Suppose there was a large increase in net exports. if the fed wanted to stabilize output, it could a. increase the money supply, which will reduce interest rates. b. decrease the money supply, which will reduce interest rates. c. decrease the money supply, which will increase interest rates. d. increase the money supply, which will increase interest rates.

The correct answer is option c.

Explanation:

The increase in net exports indicates means there is a surplus in trade. An increase in net exports will lead to a rightward shift in the aggregate demand curve, further causing an increase in output level.

In order to stabilize the output level, the government can reduce the money supply,  this will lead to a decline in the amount of money held by people. The supply of loan-able funds will be reduced as well, leading to an increase in the interest rate. As the interest rate  rises, borrowing will become expensive so the firms will not get motivated to increase output.  

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