A wave of pessimism among US investors and consumers reduces spending. If the US Federal Reserve (whose remit is broader than the Bank of England’s, which targets only inflation) uses activist stabilisation policy, what should it do?
Correct answer D. Decrease interest rates
Explanation
The Fed controls monetary, not fiscal, policy. To offset weak demand it would cut interest rates, encouraging borrowing, investment and consumption, which shifts aggregate demand back to the right.
Discussion