What economic action can the Federal Reserve be expected to take in response to high unemployment and low consumer confidence?

In a situation marked by high unemployment and low consumer confidence, the Federal Reserve typically aims to stimulate economic activity. The correct response involves increasing the money supply and lowering interest rates.

When the Fed increases the money supply, it encourages banks to lend more, as they have more capital to provide loans. This availability of capital leads to lower interest rates. Lowering interest rates serves to make borrowing cheaper for consumers and businesses. As loans become more affordable, consumer spending tends to rise due to the lower cost of credit. Concurrently, businesses may invest and expand because they can finance projects at a reduced cost.

This approach is intended to boost economic activity by encouraging spending and investment, which can help reduce unemployment over time. Higher consumer confidence often follows as individuals feel more secure in their financial situations, leading to increased spending further driving economic growth.

While decreasing the money supply and raising interest rates might combat inflation, it would not address the immediate challenge of high unemployment and low confidence, which is why this alternative does not align with the correct approach in the given economic context.