What action is the Federal Reserve likely taking when it increases the money supply?

When the Federal Reserve increases the money supply, one of the primary actions it may take is buying government bonds. This process, known as open market operations, involves the Fed purchasing bonds from financial institutions. By doing this, the Fed injects liquidity into the banking system, increasing the amount of money banks have available to lend. As banks have more money to offer, this encourages borrowing and investment in the economy, which can help stimulate economic growth.

Buying government bonds directly influences the supply of money in the economy because it raises the reserves of the banks and decreases the yield on the bonds, making it cheaper for consumers and businesses to borrow. This method of increasing the money supply typically leads to lower interest rates, which can further stimulate spending and investment.

The other choices relate to actions that would typically restrict the money supply or have a more neutral effect, which is why they do not align with the intent behind increasing the money supply.