Suppose a wave of investor and consumer pessimism causes a reduction in spending. If the Federal Reserve chooses to engage in activist stabilization policy, it should

Question

a. increase government spending and decrease taxes.
b. decrease government spending and increase taxes.
c. increase the money supply and decrease interest rates.
d. decrease the money supply and increase interest rates.

Answer 1

If the Federal Reserve chooses to engage in activist stabilization policy in response to a wave of investor and consumer pessimism that causes a reduction in spending, it should:

c. increase the money supply and decrease interest rates.

This option is aligned with what the Federal Reserve typically does to counteract economic downturns and stimulate spending by making borrowing cheaper and encouraging investment and consumption.