During a recession, the Federal Reserve, charged with regulating the nation's economy, adds money to the system to make credit more easily available. Easy credit results in greater economic activity as businesses and individuals borrow to finance purchases and operations. This is called the liquidity effect in economics. Economist Milton Friedman coined the term "liquidity effect" in 1969 to describe how expansionary monetary policy affects three elements of the economy: interest rates, income and inflation.
