What action does the Federal Reserve take to increase the money supply during a recession?

What action does the Federal Reserve take to increase the money supply during a recession?

• A. Sell government securities
• B. Raise interest rates
• C. Buy government securities
• D. Decrease government spending

Answer: (C)

The Federal Reserve can increase the money supply during a recession by buying government securities. This action is a part of open market operations, which is one of the primary tools the Fed uses to influence the economy. When the Fed purchases government securities, it injects money into the banking system. This transaction increases the reserves held by banks, allowing them to lend more money to consumers and businesses. The increased lending can stimulate economic activity by encouraging spending and investment, which is particularly important during a recession when economic activity is typically reduced. This approach contrasts with selling government securities, which would take money out of circulation and decrease the money supply. Similarly, raising interest rates generally discourages borrowing and spending, which is counterproductive during a recession when the goal is to encourage economic growth. Decreasing government spending would have a similar contractionary effect and generally does not align with the goal of stimulating the economy during tough economic times.

The Federal Reserve can increase the money supply during a recession by buying government securities. This action is a part of open market operations, which is one of the primary tools the Fed uses to influence the economy.

When the Fed purchases government securities, it injects money into the banking system. This transaction increases the reserves held by banks, allowing them to lend more money to consumers and businesses. The increased lending can stimulate economic activity by encouraging spending and investment, which is particularly important during a recession when economic activity is typically reduced.

This approach contrasts with selling government securities, which would take money out of circulation and decrease the money supply. Similarly, raising interest rates generally discourages borrowing and spending, which is counterproductive during a recession when the goal is to encourage economic growth. Decreasing government spending would have a similar contractionary effect and generally does not align with the goal of stimulating the economy during tough economic times.