Which of the following actions by the Fed would be intended to fight recession? A. Raising...

Which of the following actions by the Fed would be intended to fight recession?

	A.	Raising the reserve requirement.
	B.	Buying bonds in the open market.
	C.	Raising the Discount Rate.
	D.	All of the above are intended to fight recession.

Solutions

Expert Solution

Let's first understand what the recession means to us. Recession refers to a period of temporary economic slowdown during which trade and industrial activity are reduced, usually identified by a fall in GDP for two successive quarters.

Now, to fight the recession in the market, the Fed can take any number of steps. Reserve requirement refers to the amount of cash that banks need to keep in their vaults to be able to meet its liabilities in case of sudden withdrawals.

If the Fed raises the reserve requirement, that would mean the banks will have to keep more money with them implying lesser money in the market in the form of lendings. This will not help in fighting the recession.

If the Fed decides to buy bonds in the market, that would mean more money in the hands of the general public to spend, invest, and run business. This will lead to an increase in economic activity and thus help the bank fight recession.

Thus, To fight the recession, the Fed will go with buying the bonds in the open market.

Thus, Option B is the correct answer.

Rahul Sunny answered 1 year ago

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