If the stock market booms,
A)aggregate demand increases, which the Fed could offset by increasing the money supply.
B)aggregate supply increases, which the Fed could offset by increasing the money supply.
C)aggregate demand increases, which the Fed could offset by decreasing the money supply.
D)aggregate supply increases, which the Fed could offset by decreasing the money supply.

Question

Quizplus · Accepted Answer

If the stock market booms, individuals and institutions will likely have more money and feel wealthier, leading to an increase in spending and thus an increase in aggregate demand. To prevent inflation and maintain stable prices, the Fed could offset this by decreasing the money supply via measures such as raising interest rates or reducing the quantitative easing program. Therefore, choice C is the best answer.

If the Stock Market Booms