Question

The Fed's monetary policy tools to eliminate a recession include:

Question 18 options:

	Lowering the reserve requirement, cutting the discount rate, and raising the margin requirement
	Lowering the required reserve ratio, raising the discount rate, and raising the margin requirement
	Lowering the required reserve ratio, raising the discount rate, and selling government bonds on the open market
	Lowering the required reserve ratio, cutting the discount rate, and selling government bonds on the open market
	Lowering the reserve requirement, lowering the discount rate, and buying government bonds on the open market

Answer 1

When there is a recession, the way to come out of it is to increase the liquidity and the money supply.

Banks have to maintain a minimum reserve with them as per Fed's guidelines. This is the money they are not allowed to loan out. If this reserve requirement is lowered, banks suddenly have more disposable funds to loan out. This increases liquidity in the system.

If the rate of loan for discount lending is low, there is more ease of taking loans and more demand as well. Even the riskiest loans are given out at low rates since the discount rate is lowered. This helps businesses to expand, hire workers, improve employment, put more money in the system and thus reduce inflation.

One more way for the Fd to infuse liquidity is to buy debt securities or government bonds from the open market. This gives out money to people who were previously owners of the bonds and there is additional spending with the additional money. This improves GDP and thus helps to fight recession.

So the last option is the correct answer.

Lowering the reserve requirement, lowering the discount rate, and buying government bonds on the open market

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