If the Fed wanted to keep income at the original level after a tax increase, it would need to

Question

Quizplus · Accepted Answer

Buying government securities in open market operations would increase the money supply and offset the contractionary effect of the tax increase, effectively keeping income at the original level. This is because the increase in money supply would increase aggregate demand and output, which could potentially offset the negative effects of the tax increase on consumers and firms. Selling government securities, on the other hand, would decrease the money supply and aggravate the contractionary effect of the tax increase, leading to a reduction in income. The other options listed (raising reserve requirements, raising the primary credit rate, and raising the currency-deposit ratio) would not directly affect the money supply and are typically used by the Fed to control inflation and ensure financial stability.

If the Fed Wanted to Keep Income at the Original