To increase the money supply, what action does the Federal Reserve take?

The action of buying government bonds is a method the Federal Reserve uses to increase the money supply in the economy. When the Federal Reserve purchases government bonds on the open market, it pays for these bonds by creating more money, which essentially injects liquidity into the banking system. This increase in liquidity allows banks to have more reserves, encouraging them to lend more to businesses and consumers. As banks lend more, the overall money supply in the economy expands, which can stimulate economic activity.

In the context of monetary policy, buying government bonds is a typical expansionary measure. This contrasts with the action of selling government bonds, which would absorb money from the economy and likely reduce the money supply. Increasing interest rates typically discourages borrowing and spending, leading to a contraction in money supply, rather than an increase. Similarly, decreasing the reserve requirement would allow banks to lend more but is not the direct action of purchasing government bonds, which provides more immediate increases in money supply through open market operations.