Final answer:
During the financial crisis of 2007-2008, the Federal Reserve's lender-of-last-resort activities aimed to provide liquidity and stabilize the financial system, not reduce the money supply.
Step-by-step explanation:
During the financial crisis of 2007-2008, the main purpose of the Federal Reserve's lender-of-last-resort activities was not to reduce the money supply, but rather to provide liquidity and stabilize the financial system.
When a lender of last resort, like the Federal Reserve, intervenes during a crisis, it aims to prevent widespread bank failures and maintain confidence in the banking system. By making short-term loans available to banks and other financial institutions, the Federal Reserve helps ensure that they have access to funding and can continue operating. This helps prevent a further contraction in credit and liquidity, ultimately supporting economic stability and preventing a deeper recession.
As an example, during the 2008-2009 recession, the Federal Reserve implemented quantitative easing, which involved purchasing government bonds and other securities to inject liquidity into the financial system. This helped address the credit crunch and promote lending, aiding in the recovery of the economy.