To address the problem of a recession, the Federal Reserve Bank most likely would take which of the following actions?
- Lower the discount rate it charges to banks for loans.
- Sell U.S. government bonds in open-market transactions.
- Increase the federal funds rate charged by banks when they borrow from one another.
- Increase the level of funds a bank is legally required to hold in reserve.
Answer(s): A
Explanation:
Choice "a" is correct. During a recession, real GDP has fallen and unemployment has risen. To stimulate the economy, the Fed can lower the discount rate. This causes the money supply to increase, which, in turn, causes aggregate demand to shift right. As a result, real GDP would increase and unemployment would decrease.
Choice "b" is incorrect. If the Fed sells U.S. government bonds in the open market, the money supply will decrease. This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase.
Choice "c" is incorrect. Increasing the federal funds rate would increase interest rates. Higher interest rates cause the aggregate demand curve to shift left. As a result, real GDP would decrease and unemployment would increase.
Choice "d" is incorrect. An increase in the required reserve ratio causes the money supply to decrease.
This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase.