Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could
A)increase the money supply, which will reduce interest rates.
B)decrease the money supply, which will reduce interest rates.
C)increase the money supply, which will increase interest rates.
D)decrease the money supply, which will increase interest rates.

Question

Quizplus · Accepted Answer

To stabilize output in the face of increased net exports, the Fed might aim to counteract the inflationary pressure by decreasing the money supply, which would lead to higher interest rates, thereby cooling down the economy.

Suppose There Was a Large Increase in Net Exports