Which statement best describes how the Fed responds to recessions?
(a) It decreases the tax rate
(b) It increases the interest rates
(c) It increases the money supply
(d) It increases government expenditures.
Answer: (c) It increases the money supply
Ordinarily, the monetary policy during the period of economic recession sees the Federal Reserve which is the central banking system of the United States employing the use of its monetary instruments of policy with the view of fighting recessionary influences. Out of all the practices employed by the Fed one of the most obvious is the developing measures by which one could increase the money stock in the economy. This is done by a process of; Reducing the interest rates, and purchasing government securities, which is also referred to as the open market operations or the lowering of the required reserves held by the banks. The Fed inject money into the economy to make the cost of borrowing this money cheaper in a bid to boost spending and investment. It is for this reason that this action is being taken to boost the value of AD, lift the economic growth and emerge out of the recession status. Other processes that include such factors, as a modification of tax rates or augmentation of governmental expenditures, or the direct control of interest rates, belong to other departments of the government rather than the Fed.
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