Question

You read a story in the New York Times that confidence among American consumers who borrow has fallen dramatically, while at the same time, the Federal Reserve is pursuing contractionary open market operations. Given this scenario, what might be the possible impact on the economy?

A) Increased consumer borrowing and spending
B) Reduced interest rates on consumer loans
C) Increased consumer savings and reduced spending
D) Decreased government spending and investment

Answer 1

The impact on the economy would be increased consumer savings and reduced spending.

Step-by-step explanation:

The possible impact on the economy would be increased consumer savings and reduced spending (option C). When confidence among American consumers who borrow falls dramatically, consumers may become more cautious and save more instead of spending. At the same time, the Federal Reserve pursuing contractionary open market operations will reduce the quantity of loanable funds, making it less attractive for consumers to borrow and spend. This combination of factors would result in increased consumer savings and reduced spending, which can have a contractionary effect on the economy.