Stabilization Suppose that the federal reserve has decided t

Stabilization

Suppose that the federal reserve has decided to increase the reserve requirement. Congress worries about the short run effect that this might have on GDP, so to offset this action, they could

A.  do nothing, because output will not change anyhow.

B.  decrease government spending.

C.  increase the discount rate.

D.  do nothing, because they cannot prevent changes in output anyhow.

E.  decrease taxes.

F.  buy government bonds in open market operations.

Solution

Solution: decrease taxes

Explanation: The Fed\'s restrictive monetary policy involves increasing the reserve requirement to decrease the bank lending and reduce the value of the money multiplier. However to avoid the short run effect that this might have on GDP it can reduce the taxes