Which of the following actions by banks, in coordination with the Federal Reserve, is most likely to protect the economy during a financial crisis?

• A. Restricting lending and holding excess reserves
• B. Raising interest rates to reduce borrowing
• C. Increasing lending by infusing money into the economy
• D. Selling government securities to decrease the money supply

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the role of banks and the Federal Reserve during a financial crisis. The goal is typically to stabilize the economy by ensuring liquidity and encouraging economic activity.
2. Step 2: Analyze the effect of restricting lending and holding excess reserves. This action reduces the money circulating in the economy, which can worsen a crisis by limiting credit availability.
3. Step 3: Consider the impact of raising interest rates. Higher rates make borrowing more expensive, which tends to slow down economic activity and is usually used to combat inflation, not a crisis.
4. Step 4: Examine the effect of increasing lending by infusing money into the economy. This action increases the money supply, encourages borrowing and spending, and helps stimulate economic growth during a downturn.
5. Step 5: Review the consequences of selling government securities to decrease the money supply. This action withdraws money from the economy, which can further contract economic activity during a crisis.