Suppose that several European countries enter a recession decreasing U.S. exports. To move U.S. GDP back to potential GDP, the Fed should

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The best choice in this scenario would be for the Fed to lower the federal funds rate. By decreasing the interest rate, it becomes cheaper for businesses and individuals to borrow money and invest in the economy. This will stimulate spending, increase aggregate demand, and ultimately push GDP back towards potential GDP. Increasing the government's budget deficit, as in choice A, would have little effect on this situation. Similarly, raising the federal funds rate, as in choice B, would actually slow down economic growth and worsen the recession. Decreasing the government's budget deficit, as in choice C, could potentially help in the long run, but would not be effective in the short term for addressing the immediate decrease in exports.

Suppose That Several European Countries Enter a Recession Decreasing U