Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

In a period of low inflation and economic recession, the Federal Reserve (often referred to as the Fed) typically takes actions aimed at stimulating economic growth and increasing liquidity in the financial system. One effective method for achieving this goal is through open market operations, specifically by buying bonds.

When the Fed buys bonds in the open market, it injects liquidity into the banking system, effectively increasing the money supply. This can lead to lower interest rates, making borrowing less expensive for consumers and businesses. Consequently, increased borrowing and spending can help stimulate economic activity and support recovery from recessionary conditions.

Moreover, buying bonds sends a positive signal to the markets, reinforcing the Fed's commitment to support the economy during tough times. This strategy is particularly beneficial in a low-inflation environment, where there is less concern about price stability, and the focus shifts to promoting growth and reducing unemployment.

In contrast, increasing the federal funds rate or implementing tax decreases would generally be counterproductive in a recessionary environment, as these actions could further contract consumer spending and business investments. Requiring banks to hold more reserves could also tighten credit availability, complicating recovery efforts. Thus, purchasing bonds aligns with the Fed's overarching goal of fostering economic recovery during periods of slow growth and