Question

After the housing market collapse in the late 2000s, the U.S. economy suffered a downturn. In what ways could the Federal Reserve reduce the size of this downturn?
a. It could raise the interest rates to double what they were.
b.It could decrease the interest rates on banks loans.
c. It could buy and rebuild houses to create jobs.
d. It could sell mortgages to improve housing market growth.

Answer 1

I'd probably go with (B) because that's what the Fed did. It reduced interest rates on loans that banks make to each other to near zero as part of its efforts to stimulate the economy and keep it liquid.

The others don't make sense, or are really dangerous actions that could have made the situation worse. Raising interest rates makes it less attractive to entertain any kind of loan. Buying and rebuilding houses to create jobs is not a solution, either, since you still have to sell those houses to someone -- and after the housing bubble burst, the market dried up with people selling their homes at discounts if they wanted to move. Selling mortgages wouldn't help, either, especially when banks had made bad mortgage bets that helped lead into the downturn in the first place.