If there is a sudden increase in government spending,which of the following should the Fed do if it wants to keep output unchanged?
A) Do nothing,since the self-correcting mechanism will adjust the economy
B) Sell bonds in the open market
C) Wait,since output usually does not change when government spending increases
D) Decrease the required reserve ratio
E) Buy bonds in the open market.

Question

Quizplus · Accepted Answer

Selling bonds in the open market would decrease the money supply, which would increase interest rates and offset the increase in aggregate demand caused by the rise in government spending, helping to keep output unchanged.

If There Is a Sudden Increase in Government Spending,which of the Following