Suppose a wave of investor and consumer pessimism in the USA causes a reduction in spending If the US federal Reserve (Which has a broader remit than the Bank of England Which is charged only with controlling inflation) chooses to engage in activist stabilization policy it should ?
Correct answer: D. decrease interest rates
- A. Increase government spending and decrease taxes
- B. decrease the money supply
- C. decrease government spending and increase taxes
- D. decrease interest rates
Explanation
Pessimism reduces aggregate demand, so the Federal Reserve should use expansionary monetary policy by lowering interest rates. Lower rates encourage investment and consumption, offsetting the fall in private spending.
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About Macroeconomics
The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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