If a surge of pessimism among investors and consumers in the United States leads to a drop in spending, and the US Federal Reserve (which has a wider mandate than the Bank of England, which focuses solely on inflation control) decides to implement an active stabilization policy, what action should it take?

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Boost government expenditure and lower tax ratesReduce the amount of money circulating in the economyCut government spending and raise taxesLower interest ratesNone of the above

Explanation

In response to decreased spending caused by negative sentiment, the Federal Reserve would typically lower interest rates to encourage borrowing and investment, thereby stimulating economic activity. Increasing government spending or altering taxes is generally the role of fiscal policy, not the Federal Reserve. Reducing the money supply or increasing taxes would further contract the economy, which is counterproductive in this situation.