Final answer:
The Federal Reserve can fight recession by lowering interest rates as a part of an expansionary monetary policy, which aims to stimulate economic activity and reduce unemployment.
Step-by-step explanation:
The Federal Reserve can fight recession by adopting an expansionary monetary policy which includes lowering interest rates. When there is a recession and unemployment rates increase, the Federal Reserve can stimulate output and decrease unemployment through such monetary policies. Lowering interest rates reduces the cost of borrowing for consumers and businesses, which in turn can increase consumption and investment, helping to boost economic activity.
During the Great Recession, to combat deep economic downturns, the Federal Reserve slashed interest rates, bringing them down significantly to encourage spending and investment. Although the Federal Reserve cannot directly lower taxes—which is a fiscal policy decision made by the government—they can influence the economy by adjusting the monetary supply and interest rates, which are powerful tools to spur economic growth.