To reduce the effects of crowding out caused by an increase in government expenditures, the federal reserve could

a.

increase the money supply by selling government securities

b.

decrease the money supply by buying government securities

c.

increase the money supply by selling government securities

d.

increase the money supply by buying government securities

D) Increase the money supply by buying government securities

Explanation:

When public investment crowds out private investment, it is because the government is making use of all, or most of the supply of loanable funds in the economy. This causes the interest rates to rise, making it more expensive for the private sector to borrow and invest.

The Central Bank can step in and help solve this problem by lowering the interest rate. It can do so by buying government securities. The money used to buy these securities enters the economy, making the money supply grow, including the supply of loanable funds, causing the interest rate to fall.

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