When a recession hits, we would expect the government to run a budget deficit by raising the level of its spending or by cutting taxes, or perhaps both. The Fed would be expected to:
A) reduce the required reserve ratio, increase the discount rate, and buy securities on the open market.
B) reduce the required reserve ratio, reduce the discount rate, and sell securities on the open market.
C) reduce the required reserve ratio, reduce the discount rate, and buy securities on the open market.
D) increase the required reserve ratio, reduce the discount rate, and sell securities on the open market.
E) increase the required reserve ratio, increase the discount rate, and sell securities on the open market.

Question

Quizplus · Accepted Answer

When a recession hits, the goal of the Fed is to stimulate economic activity by increasing the supply of money in the economy. The Fed can achieve this by reducing the required reserve ratio (the amount of money banks are required to hold in reserve), reducing the discount rate (the interest rate at which banks can borrow from the Fed), and buying securities on the open market (which injects money into the economy). Therefore, choice C – reducing the required reserve ratio, reducing the discount rate, and buying securities on the open market – is the best option.

When a Recession Hits, We Would Expect the Government to Run