SIE (Securities Industry Essentials) Practice Exam

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In a period of low inflation and economic recession, the Federal Reserve is expected to take which of the following actions?

Increase interest rates
Sell bonds in the open market
Buy bonds in the open market
Increase reserve requirements

The correct answer is: Buy bonds in the open market

During a period of low inflation and economic recession, the Federal Reserve is expected to take measures to stimulate the economy and encourage borrowing. This typically includes buying bonds in the open market in order to increase the money supply and keep interest rates low. Selling bonds or increasing interest rates could have the opposite effect and further slow down economic growth. Increasing reserve requirements, or the amount of money banks are required to hold in reserve, could also restrict lending and hinder economic recovery. Therefore, buying bonds in the open market is the most likely action for the Federal Reserve to take in this situation.