In an effort to address the troubled economy, ..."For 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." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008
The Fed's rate cuts will ________ bank reserves and ________.
A) increase; increase the money supply and real GDP
B) decrease; decrease the money supply and real GDP
C) increase; increase the exchange rate and real GDP
D) decrease bank reserves; decrease the exchange rate and real GDP

Question

Quizplus · Accepted Answer

The Federal Reserve's decision to cut interest rates typically increases bank reserves because it lowers the cost of borrowing money, which encourages banks to lend more. This, in turn, increases the money supply as more money is available in the economy. An increased money supply can stimulate economic activity, leading to an increase in real GDP.

In an Effort to Address the Troubled Economy