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:

Question

Quizplus · Accepted Answer

During a recession, the Fed would typically engage in expansionary monetary policy, which involves reducing the required reserve ratio to increase the amount of reserves available for banks to loan out, reducing the discount rate to encourage borrowing and lending, and buying securities on the open market to increase the money supply. Choice A includes increasing the discount rate, which would be counterproductive during a recession. Choice B includes selling securities on the open market, which would also be counterproductive during a recession. Choice D includes increasing the required reserve ratio, which would be contractionary and thus counterproductive during a recession.

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