Final answer:
To increase the monetary base and decrease interest rates, the Fed buys Treasury bills, which puts more money into the banking system and lowers interest rates by increasing liquidity.
Step-by-step explanation:
To increase the monetary base and decrease interest rates, the Federal Reserve (Fed) would engage in an open market operation involving the purchase of Treasury bills (bonds). This action injects money into the banking system, thereby increasing the money supply. When the Fed buys bonds, money flows from the central bank into individual banks, which increases the money supply and typically lowers interest rates due to the added liquidity.
Option C, buying Treasury bills, is the correct answer. Neither lending less through the Discount Window (A) nor increasing the required reserve ratio (B) would achieve the aim of increasing the monetary base and lowering interest rates; in fact, they are likely to have the opposite effect. Selling Treasury bills (D) would decrease the money supply, thereby possibly increasing interest rates, which does not align with the goal stated in the question.