Assume that there is equilibrium in both the goods and the money market at all times. Suppose that the president of the United States has decided to start a war. The government will have to increase spending to pay for weapons, equipments, and transportation.
What, if anything, can the Fed do to keep the interest rate at its initial level despite the increase in government expenditure?
A. The Fed can advise consumers to increase consumption and urge firms to increase investment.
B. The Fed cannot control the interest rate, because the president started the war.
C. The Fed can decrease the money supply by the appropriate amount.
D. The Fed can increase the money supply by the appropriate amount.
I believe that the Fed can increase money supply so this can lower the interest rate. Is this correct, please help!