When a Recession Hits, We Would Expect the Government to Run

question 76

Multiple Choice

When a recession hits, we would expect the government to run a budget deficit by raising the level of its spending or by cutting taxes, or perhaps both. The Fed would be expected to:

• A) reduce the required reserve ratio, increase the discount rate, and buy securities on the open market.
• B) reduce the required reserve ratio, reduce the discount rate, and sell securities on the open market.
• C) reduce the required reserve ratio, reduce the discount rate, and buy securities on the open market.
• D) increase the required reserve ratio, reduce the discount rate, and sell securities on the open market.

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Definitions:

Residual Income

The amount of net income an entity generates beyond its required rate of return on its investments.

Invested Assets

Assets that a company or individual allocates resources toward with the expectation of generating a future benefit or income.

Maximum Return

The highest possible profit or gains that can be achieved from an investment or business venture.

Income From Operations

The profit realized from a business's ongoing operations, excluding any income derived from investments or extraordinary one-time events.