If the economy slips into recession, the Fed ________ the federal funds rate, which ________ the short−term interest rate, and ________ the quantity of money.
A.
lowers; lowers; decreases
B.
lowers; lowers; increases
C.
raises; lowers; decreases
D.
lowers; raises; increases
E.
raises; lowers; increases
Answer
C.
raises; lowers; decreases
In most cases, the Fed raises or lowers the federal funds rate through open market operations
Explanation
Basically, the Fed can also change the reserve requirements of banks as an alternative here, this causing the amount of cash banks must legally hold. By decreasing the reserve requirement, therefore, the banks are able to give out more loan from the cash which increases money supply resulting into higher inflation and a lower federal funds rate
