If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by
A) decreasing money supply to spur the economy out of the recession.
B) increasing money supply, lowering real interest rates, and encouraging borrowing.
C) increasing government expenditures to spur the economy out of the recession.
D) decreasing corporate taxes to encourage firms to increase their spending.

Question

Quizplus · Accepted Answer

When businesses decrease spending due to a pessimistic outlook, the economy can enter a recession. In this situation, the Fed can counteract the decrease in spending by increasing the money supply, lowering real interest rates, and encouraging borrowing. This would provide businesses with the access to capital they need to invest in and grow their operations, which would in turn stimulate economic growth. Decreasing money supply or decreasing corporate taxes are less effective solutions as they do not directly address the issue of decreased spending in the economy. Increasing government expenditures could be a solution, but this would depend on the specifics of the situation and could lead to higher deficits or inflation.

If Businesses React to a Pessimistic Outlook and Decrease Spending