The Federal Reserve can increase aggregate demand by
A) reducing the money supply.
B) reducing the discount rate.
C) raising the reserve requirement.
D) selling government securities in the open market.

Question

Quizplus · Accepted Answer

By reducing the discount rate, the Federal Reserve is encouraging banks to borrow more money, resulting in an increase in the money supply. This, in turn, increases the amount of money available for consumers to spend, thus increasing aggregate demand. Reducing the money supply (option A), raising the reserve requirement (option C), and selling government securities in the open market (option D) all have the opposite effect of decreasing the money supply and reducing aggregate demand.

The Federal Reserve Can Increase Aggregate Demand by