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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