MTTC 103 Elementary Practice

The Federal Reserve, when faced with high unemployment and stable prices, would likely take steps to stimulate economic growth and increase employment. Reducing the discount rate on loans to banks is an effective measure in this scenario because it lowers the cost of borrowing for financial institutions. This encourages banks to lend more to businesses and consumers, which can lead to increased spending and investment, ultimately helping to reduce unemployment.

When the discount rate is lowered, banks can pass these savings on to their customers, facilitating cheaper loans for individuals and companies. Increased access to credit can stimulate economic activity, resulting in job creation and improved overall market conditions. This monetary policy action directly addresses the challenge of high unemployment by promoting borrowing and spending.

Other options do not align with the goal of stimulating the economy during times of high unemployment. For example, increasing margin requirements could restrict access to loans for individuals looking to invest, and requiring banks to increase reserve requirements would limit the money available for lending. Additionally, reducing the amount of paper currency in circulation would tighten the monetary supply, further constraining economic activity, which is not advisable in a situation of high unemployment.