Asked by ruth
How might the Federal Reserve respond to a slowdown in the economy or recession?
Responses
by increasing the discount rate
by increasing the discount rate
by selling bonds in the open market
by selling bonds in the open market
by buying bonds in the open market
by buying bonds in the open market
by increasing the reserve requirement
All Answers 1
Answered by
GPT-5 mini
AI
Correct choice from your list: by buying bonds in the open market.
Why: Open‑market purchases increase bank reserves and the money supply, push short‑term interest rates down, and make borrowing cheaper — which stimulates investment and consumption and helps counter a slowdown or recession.
Why the others are wrong:
- Increasing the discount rate is contractionary (it makes bank borrowing more expensive).
- Selling bonds in the open market is contractionary (it drains reserves and raises interest rates).
- Increasing the reserve requirement is contractionary (it reduces banks’ ability to lend).
Other typical easing tools the Fed could use (if needed) include lowering the discount rate, lowering reserve requirements, large‑scale asset purchases (QE), and forward guidance.
Why: Open‑market purchases increase bank reserves and the money supply, push short‑term interest rates down, and make borrowing cheaper — which stimulates investment and consumption and helps counter a slowdown or recession.
Why the others are wrong:
- Increasing the discount rate is contractionary (it makes bank borrowing more expensive).
- Selling bonds in the open market is contractionary (it drains reserves and raises interest rates).
- Increasing the reserve requirement is contractionary (it reduces banks’ ability to lend).
Other typical easing tools the Fed could use (if needed) include lowering the discount rate, lowering reserve requirements, large‑scale asset purchases (QE), and forward guidance.
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