What does the Federal Reserve do to expand aggregate demand? (Choose TWO.)

To expand aggregate demand, the Federal Reserve implements expansionary monetary policy. The primary goals are to increase the availability of money and credit and to make borrowing cheaper. The Fed achieves this by increasing the money supply, which it typically does by buying government securities on the open market. This action increases reserves in the banking system, allowing for more lending. A larger money supply puts downward pressure on interest rates, specifically the federal funds rate target. Lower interest rates encourage businesses to invest and consumers to spend, thereby increasing aggregate demand.

A. Increase the foreign exchange rate: This would make domestic goods more expensive for foreigners, reducing exports and thus decreasing aggregate demand.

D. Decrease the money supply: This is a tool of contractionary monetary policy, used to reduce aggregate demand and control inflation.

E. Raise mortgage rates: This is a consequence of contractionary policy and would discourage home buying, reducing aggregate demand.

F. Reduce the quantity of reserves: This is achieved by selling government securities, which is a contractionary action that reduces the money supply.

1. The Federal Reserve. (n.d.). Monetary Policy: What Are Its Goals? How Does It Work? Federal Reserve Board. Retrieved from https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm. The document explains that to encourage economic activity, the Fed can lower interest rates and increase the money supply.

2. Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning. Chapter 20, "Money Growth and Inflation," and Chapter 21, "The Influence of Monetary and Fiscal Policy on Aggregate Demand." These chapters detail how an increase in the money supply lowers the equilibrium interest rate, stimulating investment and consumption.