Monetary policy designed to counteract a reduction in aggregate demand might include

Question

Quizplus · Accepted Answer

An increase in the money stock would encourage consumers and firms to spend more, leading to an increase in aggregate demand. This can be achieved through measures such as open market operations, where the central bank purchases government securities to inject money into the economy. Option B is not a suitable choice as increasing short-term interest rates would discourage borrowing and spending, leading to a further reduction in aggregate demand. Option C could be effective as increased government infrastructure spending would create jobs and boost aggregate demand, but it is not considered a monetary policy. Option D, an increase in individual income tax rates, may reduce overall spending and would not be a suitable means to counteract a reduction in aggregate demand.

Monetary Policy Designed to Counteract a Reduction in Aggregate Demand