Question

What happens when the Fed buys bonds in the open market, and at the same time, we experience a recession?

A) Interest rates rise, and the money supply decreases
B) Interest rates rise, and the money supply increases
C) Interest rates fall, and the money supply decreases
D) Interest rates fall, and the money supply increases

Answer 1

When the Fed buys bonds in the open market during a recession, it increases the money supply and lowers interest rates, which can help to alleviate the recessionary gap.

Step-by-step explanation:

When the Fed buys bonds in the open market during a recession, it is conducting an expansionary monetary policy to stimulate the economy. This increases the money supply and lowers interest rates. The increased money supply leads to a higher demand for goods and services and can help to alleviate the recessionary gap.