Refer to the graphs above, in which the numbers in parentheses near the AD₁, AD₂, and AD₃ labels indicate the levels of investment spending associated with each curve. All figures are in billions. A shift in the aggregate demand curve from AD₃ to AD₂ can be achieved by Federal Reserve action to: A) Increase the reserve ratio B) Increase the discount rate C) Buy government securities in the open market D) Sell government securities in the open market

Question

Quizplus · Accepted Answer

The Federal Reserve can increase aggregate demand by buying government securities in the open market, which increases the money supply and lowers interest rates. Lower interest rates then stimulate investment spending and increase aggregate demand. Increasing the reserve ratio or discount rate would have the opposite effect, lowering the money supply and raising interest rates, which would decrease investment spending and reduce aggregate demand. Selling government securities in the open market would also decrease the money supply and raise interest rates, leading to a reduction in investment spending and aggregate demand. Therefore, the only option that would shift the aggregate demand curve to AD₂ is for the Federal Reserve to buy government securities in the open market.

Refer to the Graphs Above, in Which the Numbers in Parentheses