Citi Bank Technical Practice Test 2025 – The All-in-One Guide to Excel in Your Exam Preparation!

Inflation typically leads central banks to raise interest rates as a way to control the money supply and stabilize the economy. When inflation rises, it indicates that prices for goods and services are increasing, which can erode purchasing power. To combat this, central banks may implement higher interest rates to make borrowing more expensive. This helps to decrease consumer spending and investment, thereby cooling off demand and reducing inflationary pressures.

By increasing interest rates, central banks are effectively tightening monetary policy, aiming to restore balance in the economy. This action reflects a proactive approach to managing inflation; maintaining control over the money supply is critical to prevent runaway inflation and ensure economic stability. As such, the answer that states central banks raise interest rates during inflation to control the money supply accurately captures the typical response to inflationary trends.