When a major negative aggregate demand shock hits the economy,a central bank can "maintain market confidence" by:
A) raising the Federal Funds rate.
B) buying stocks in the stock market.
C) selling Treasury securities in the open market.
D) promising to increase the growth rate of money if the economy worsens further.

Question

Quizplus · Accepted Answer

Promising to increase the growth rate of money if the economy worsens further can help maintain market confidence by reassuring investors and households that the central bank is committed to preventing a prolonged downturn and is willing to use monetary policy to support the economy. A and C could worsen the negative aggregate demand shock by reducing the availability of credit and increasing interest rates, while buying stocks in the stock market would be outside the central bank's usual tools and could raise questions about its impartiality.

When a Major Negative Aggregate Demand Shock Hits the Economy,a