Question

First, if economists expect that there will be a recession, should interest rates increase or decrease (and related to this, should the Federal Reserve increase or decrease the money supply), and why?

Answer 1

If the firms expect a recession the demand for new investment will decrease and at a lower demand the savings will be more than the investment i.e. the supply of funds will be more than the demand for funds. This will decrease the interest rates. Allowing the firms to borrow more at a lower rate.

In case of recession, the demand is low in the economy. The Federal Reserve will increase the money supply and decrease the interest rates further. An increased money supply will give extra money in the hands of the people and they will demand more products in the economy. Increased demand will bring the economy out of recession.