Final answer:
The correct response to the student's question is: a. Net exports rise, which increases the aggregate quantity of goods and services demanded, as this would result in an outward shift of the AD curve and help bring real GDP back to its target.
Step-by-step explanation:
If the Federal Reserve (the Fed) wanted to stabilize output and return real GDP to its original value following a large decline in net exports (NX) which are a part of aggregate demand (AD), it would need to implement policies that effectively offset this decrease in AD. Given that a reduction in NX reduces aggregate demand, thereby causing the aggregate demand curve to shift to the left and real GDP to drop, the Fed could engage in expansionary monetary policy to counteract this effect.
Such policies might include lowering interest rates to encourage borrowing and spending, or purchasing securities in the open market to inject liquidity into the economy. The goal would be to boost consumption, investment, and government spending, which are other components of aggregate demand, to compensate for the loss in net exports. As a result, the aggregate demand curve would shift to the right, helping to increase the aggregate quantity of goods and services demanded and return real GDP to its previous level.
Therefore, the correct response to the student's question is: a. Net exports rise, which increases the aggregate quantity of goods and services demanded, as this would result in an outward shift of the AD curve and help bring real GDP back to its target.