If the Federal Reserve uses open market operations to offset a recession, the Fed ________ government securities in order to ________ the federal funds rate.
A) sells; raise
B) sells; lower
C) buys; raise
D) buys; lower
E) buys; not change

Question

Quizplus · Accepted Answer

When the economy is in a recession, the Fed can use open market operations to increase the money supply and lower interest rates, which can stimulate borrowing and spending. To do this, the Fed would buy government securities from banks, which injects money into the economy and increases the supply of reserves that banks have to lend out. This increase in the supply of reserves puts downward pressure on the federal funds rate, which is the interest rate that banks charge each other for overnight loans. Therefore, the Fed would buy government securities to lower the federal funds rate and stimulate the economy.

If the Federal Reserve Uses Open Market Operations to Offset