The Federal Reserve can increase aggregate demand by:

• A. lowering the federal funds rate
• B. increasing the discount rate
• C. selling government securities in the open market
• D. raising the reserve requirement

Answer: (A)

Verified step by step guidance

1. Step 1: Understand that aggregate demand (AD) increases when consumers and businesses have more access to cheaper credit, encouraging spending and investment.
2. Step 2: Recall that the Federal Reserve influences interest rates primarily through the federal funds rate, which is the rate banks charge each other for overnight loans.
3. Step 3: Recognize that lowering the federal funds rate makes borrowing cheaper, which tends to increase aggregate demand by encouraging more spending and investment.
4. Step 4: Note that increasing the discount rate, selling government securities, or raising the reserve requirement generally have the opposite effect—they restrict money supply or increase borrowing costs, which decreases aggregate demand.
5. Step 5: Conclude that among the options, lowering the federal funds rate is the correct action the Federal Reserve takes to increase aggregate demand.