If the stock market crashes, then Select one: a. aggregate demand increases, which the Fed could offset by increasing the money supply. b. aggregate demand increases, which the Fed could offset by decreasing the money supply. c. aggregate demand decreases, which the Fed could offset by increasing the money supply. d. aggregate demand decreases, which the Fed could offset by decreasing the money supply.

The correct answer is C. If the stock market crashes, then aggregate demand decreases, which the Fed could offset by increasing the money supply.

Explanation:

A stock market crash would necessarily imply a significant loss of value for many large companies. Some would even go to the point of bankruptcy, leaving thousands and thousands of employees unemployed, and shortening the market for their production. Others would not go bankrupt, but they would also fire people to balance their finances. In short, a recessive economic situation necessarily generates unemployment, which in turn affects aggregate demand in a negative way: the less money the population has, the less it consumes.

One way the government can counter this situation is through the Federal Reserve, which can increase the money supply, that is, the amount of dollars that are in circulation, so that companies obtain liquidity and can renew their production and their payroll, and so that people in turn have money to consume these products, thus reactivating the economy.

The increase in the money supply by the Fed must be carried out without indiscriminately issuing money, as this situation generates inflation. One way to increase the money supply is through the reduction of bank reserve rates, with which banks have more money to finance society's consumption, in turn without imposing high interest rates.

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