Final answer:
During a period of low inflation and economic recession, the Federal Reserve is likely to buy bonds in the open market. This expansionary policy increases the money supply and decreases interest rates to encourage spending and investment, thereby stimulating economic growth. C. buy bonds in the open market
Step-by-step explanation:
In a period of low inflation and economic recession, the Federal Reserve is expected to engage in expansionary monetary policy to stimulate the economy. According to traditional methods of monetary policy, one of the actions the Fed could take is to buy bonds in the open market. This process increases the money supply, decreases the interest rate, and encourages investment and consumption, which can help to alleviate the recession.
When the Fed buys bonds, it increases the reserves of the banks, allowing them to make more loans and thus increasing the overall money supply in the economy. A greater money supply tends to reduce interest rates, as there is more money available for borrowing. This can lead to an increase in spending and investment by households and businesses, potentially stimulating economic activity.
Moreover, engaging in open market operations like buying bonds is consistent with the Fed's goals during a recession, which includes lowering unemployment and stabilizing prices. By lowering interest rates and increasing the money supply, the Fed aims to make borrowing cheaper, encourage spending, and support job creation. This approach contrasts with methods like raising reserve requirements or increasing the federal funds rate, which are contractionary measures used to fight high inflation.