Which action by a federal government agency reflects the belief that people respond to incentives in predictable ways?

• A. The Environmental Protection Agency issues a new set of pollution standards in response to evidence of deteriorating air quality.
• B. The Consumer Product Safety Commission initiates a recall of defective and unsafe home appliances.
• C. The Federal Reserve Board takes steps to increase the money supply during a period of rising unemployment and declining industrial output.
• D. The Federal Trade Commission blocks a merger that will reduce competition in a major industry.

Answer: (C)

Pushing policy based on how people respond to incentives is a core way economists think about influencing behavior. When the Federal Reserve increases the money supply, it lowers interest rates and makes borrowing cheaper. That change in incentives encourages households to borrow and spend and encourages firms to invest, which can boost production and reduce unemployment during a downturn. This illustrates using incentive effects to shape economic activity at a macro level.

The other actions respond to problems or protect safety rather than shaping behavior through incentives. Setting new pollution standards addresses environmental harm; recalling defective products focuses on consumer safety; blocking a merger aims to preserve competition. While these are important, they aren’t framed around using incentive-driven expectations to steer economic outcomes like monetary expansion is.