Which of the following describes the chain of events the Fed uses to fight recession?

Question

Quizplus · Accepted Answer

To combat a recession, the Federal Reserve (Fed) typically lowers the federal funds rate target, which makes borrowing cheaper. This action is often accompanied by the purchase of government securities in the open market, which increases the reserves of banks. With more reserves, banks can increase lending. This increase in lending boosts spending and investment, thereby increasing aggregate demand in the economy, which is essential for stimulating economic growth during a recession.

Which of the Following Describes the Chain of Events the Fed