Question

During a period of recession the Federal Reserve 1. increases the target federal funds rate 2....

During a period of recession the Federal Reserve

1. increases the target federal funds rate

2. buys government securities

3. sells government securities

a.

1 and 3

b.

3 and 4

c.

1 and 2

d.

2 and 4

4. lowers the target federal funds rate

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Answer #1

The correct answer is

d) 2 and 4

It lowers the federal funds rate and will buy securities.

During a recession the Federal reserve would try to reduce the interest rate and increase the liquidity in the system in order to boost the economic activity so it will lower the federal funds rate and buys the government securities in order to increase the liquidity in the system.

It will increase the rate when it want to curtail the excess lending and borrowing, it will sell securities to remove the excess liquidity.

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