Suppose households attempt to increase their money holdings.To stabilize output by countering this increase in money demand,the Federal Reserve would
A)increase government spending.
B)increase the money supply.
C)decrease government spending.
D)decrease the money supply.

Question

Quizplus · Accepted Answer

If households attempt to increase their money holdings, it implies that they want to increase their savings. This increased demand for money can lead to a decrease in spending, which can ultimately decrease output. To stabilize output, the Federal Reserve can increase the money supply by buying government securities or lowering the reserve requirements for banks. This will increase the availability of money and lower interest rates, which can increase spending, and hence stabilize output. Therefore, Option B - increase the money supply is the best choice.

Suppose Households Attempt to Increase Their Money Holdings