Question

Suppose there is an event in the economy that lowers consumer confidence which led people to...

Suppose there is an event in the economy that lowers consumer confidence which led people to save more. The Fed would like to stabilize demand in the economy. What should the Fed do?

increase the money supply to raise the interest rate

increase the money supply to lower the interest rate

decrease the money supply to raise the interest rate

decrease the money supply to lower the interest rate  
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Answer #1

As we can see, people will save more money because of the lower consumer confidence and that will reduce the aggregate spending in the economy and this may put the economy in recession period. Therefore, in order to, stabilise demand in the economy the Fed should increase the money supply to lower the interest-rate. The lower interest rate will increase the investment level in the economy which will lead to increase in the output and income level in the economy. As the income of the people increases they will spend more money on the consumption of goods and services that will stabilise the demand in the economy.

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