Final answer:
The best suggestion for the Federal Reserve to increase the money supply during a recession is to buy government bonds on the open market. This action is part of an expansionary monetary policy which leads to lower interest rates, increased investment, and stronger aggregate demand. Therefore correct option is B
Step-by-step explanation:
If there is a recession and the Federal Reserve needs to increase the money supply, the best suggestion among the given options is to buy government bonds on the open market. When the Federal Reserve buys government bonds, it essentially injects money into the economy, thereby increasing the total money supply. This process is part of an expansionary monetary policy, which helps lower interest rates, stimulates investment, and can lead to a stronger aggregate demand in the economy. By contrast, selling government securities or raising the discount rate would have the opposite effect, tightening the money supply and potentially exacerbating the recession. Encouraging individual stock market investments is not a direct tool of monetary policy.
Lower interest rates would reduce the demand for and increase the supply of dollars in the currency market, leading to a lower exchange rate. The lower exchange rate can stimulate net exports, contributing further to an increase in aggregate demand. Ultimately, these actions help shift the aggregate demand curve to the right, reducing the recessionary gap and fostering economic recovery.