In an effort to address the troubled economy, ...ʺFor the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn.ʺ Rates have not been this low ʺ... since 2003, when the economy was growing at a snailʹs pace.
The Fedʹs rate cuts will__________bank reserves and __________.

Question

Quizplus · Accepted Answer

When the Fed cuts interest rates, it increases the money supply and decreases borrowing costs, which in turn stimulates spending and investment in the economy. This leads to an increase in real GDP. Additionally, the increase in the money supply tends to weaken the value of the currency, leading to a decrease in the exchange rate. Finally, decreased interest rates also encourage banks to increase lending, increasing the money supply further. Therefore, the best choice is D - the Fed's rate cuts will increase bank reserves and increase the money supply and real GDP.

In an Effort to Address the Troubled Economy