Question

How might the federal reserve respond to a slowdown in the economy or recession?

Option 1: By increasing the reserve requirement.
Option 2: By selling bonds in the open market.
Option 3: By increasing the discount rate.
Option 4: By buying bonds in the open market.

Answer 1

The Federal Reserve can stimulate the economy during a recession by buying bonds in the open market, which is part of their expansionary monetary policy aimed at lowering interest rates and injecting liquidity to promote economic growth.

Step-by-step explanation:

The Federal Reserve might respond to a slowdown in the economy or recession by engaging in expansionary monetary policy, which often includes buying bonds in the open market, a process known as Quantitative Easing (QE). When the Federal Reserve buys bonds, it injects money into the economy, makes credit more available, and lowers interest rates, thereby stimulating economic growth.

This was evident during times of financial stress, such as the Great Recession and the 2008-2009 recession. The strategy is to make financial conditions more accommodating, support economic activity, and foster job creation by exerting downward pressure on longer-term interest rates through open market operations, among other monetary policy tools.