Final answer:
To increase the money supply, the Federal Reserve buys Treasury securities, injecting money into the banking system and lowering interest rates.
Step-by-step explanation:
If the Federal Reserve wants to increase the money supply, it will buy Treasury securities.
The Federal Reserve, or the Fed, conducts open market operations to control the money supply within the economy. If the goal is to increase the money supply, the Fed will purchase Treasury securities. This action involves the central bank paying for these securities, and the money used to pay for them is injected into the banking system. When the Fed buys these securities, it credits the reserve accounts of banks with the amount of money that it paid, thus increasing the amount of money that banks have available to lend. More funds in the banking system means it is easier for banks to lend money, which effectively lowers interest rates and encourages borrowing and spending, leading to an increased money supply in circulation.
For example, when the Fed buys Treasury securities from banks or other financial institutions, it pays for those bonds with newly created money. This injects additional funds into the banking system, making it easier for banks to lend money to businesses and consumers.