<p>Hi, here is a quick question:</p>
<pre><code>from PR actually,
</code></pre>
<p>which of the following policies might the Fed adopt to counter a recession?</p>
<li>a decrease in taxes</li>
<li>an increase in government spending</li>
<li>an increse in the discount rate</li>
<li>an increase in the required reserve ratio</li>
<li>the purchase of bonds</li>
</ol>
<p>and the answer is</p>
<p>5, the last one</p>
<p>can anyone explain this to me??</p>
<p>thanks!@@@</p>
<p>okay, it's a recession so we want an expansionary/easy policy. the question asks what the fed can do, so we know it's a monetary policy. 1 and 2 are out b/c they are fiscal policies. 3 and 4 are contractionary/tight policies- they decrease banks' ability to lend out money. 5 is correct- the fed buys bonds using the "magic checkbook" as we like to call it in my econ class and increases the money supply. increasing the money supply increase AD. The interest rate goes down so investment goes up and GDP goes up.</p>
<p>First of all, the Federal reserve cannot control government spending, or taxes, so that eliminates the first two (although both would counter a recession).</p>
<p>An increase in the discount rate would decrease the incentive for banks to borrow from the Fed, therefore decreasing the money supply.</p>
<p>An increase in the RR would decrease the money multiplier it is equal to 1/RR.</p>
<p>Buying of bonds would take the money from the fed and give it to the bond sellers, which would increase the money supply.</p>
<p>And, increasing the money supply leads to lower interest rates, more investment/consumption spending, and finally an increase in Aggregate demand, which counters the recession.</p>
<p>wow..thanks so much.writonthetransom and runforfun529 ...
both of your explanations are really helpful...</p>
<p>really appreciate.......</p>