Question

the federal reserve can increase aggregate demand by reducing taxes on households and firms. reducing the money supply and reducing the inflation rate. increasing the money supply and reducing the interest rate. increasing the money supply and increasing government purchases.

Answer 1

Correct option is B, The federal reserve can increase aggregate demand by increasing the money supply and reducing the interest rate.

How the Fed Impacts Aggregate Demand?

While the Federal Reserve has a very small direct impact on overall demand, it can indirectly enhance demand by lowering interest rates. Asset prices increase when interest rates are reduced. Consumer confidence is increased by rising asset values for assets like homes and equities, which leads to larger purchases and higher levels of overall expenditure. Higher stock prices often make it possible for corporations to raise more money at more favorable interest rates.

Finding a balance between the conflicting objectives of employment and price levels falls under the purview of the Fed. However, each of these computations heavily depends on aggregate demand. As a result, it worries the Federal Reserve a lot.

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