To increase the money supply, the Federal Reserve:

The Federal Reserve increases the money supply primarily through open market operations, which involve buying and selling government bonds. When the Federal Reserve buys government bonds, it pays for these bonds with money that it creates. This action adds to the reserves of the banking system, effectively increasing the amount of money banks have available to lend. As banks have more funds available, they can offer more loans, which stimulates economic activity by increasing overall spending in the economy.

In contrast, selling government bonds would decrease the money supply because when the Federal Reserve sells bonds, it takes money out of the banking system, reducing the amount available for lending. Buying or selling corporate stocks is not a tool used by the Federal Reserve to manage the money supply; its focus is specifically on government securities. Thus, the correct answer reflects the mechanism by which the Federal Reserve can effectively increase the liquidity in the financial system.