Question

Use the table to answer the question.

Year
2004 2005 2006 2007 2008 2009
Money supply 6,266.8 6,535.1 6,877.4 7,298.1 7,790.8 8,416
Discount rate 2.34 4.19 5.96 5.86 2.39 0.50
Using the data in the table, which of the following explains under what condition the Federal Reserve would change the discount rate
as it did from 2007 to 2009?
(1 point)
O lowering the discount rate as a response to cool a growing economy
lowering the discount rate as a response to increasing inflation
O lowering the discount rate as a result of the increase in the money supply
O lowering the discount rate as a response to a slowing economy

Answer 1

The Federal Reserve lowered the discount rate from 2007 to 2009 as a response to a slowing economy during the Great Recession, aiming to stimulate economic activity and combat high unemployment.

Using the data from the table provided and historical context from the Federal Reserve's actions, we can determine that the condition under which the Federal Reserve would change the discount rate, as it did from 2007 to 2009, was in response to a slowing economy. In Episode 9, during the Great Recession in 2008, the Federal Reserve cut interest rates aggressively, down to nearly 0% by 2009. This action was taken when traditional monetary policy tools, such as open market operations, were insufficient due to already low-interest rates, which could not be reduced into negative territory.

Therefore, it was necessary for the Federal Reserve to lower the discount rate as a form of economic stimulus to encourage lending and investment, when the economy was in recession and needed support. The lowering of the discount rate is a part of a broader monetary policy strategy to inject liquidity into the financial system, spur economic activity, and combat the high unemployment rates that typically accompany a recession.