How can the Federal Reserve expand the money supply?

The Federal Reserve can expand the money supply primarily through open market operations, specifically by buying securities from banks. When the Federal Reserve purchases securities, it credits the banks' reserves, effectively increasing the amount of money that banks have on hand to lend out. This influx of reserves allows banks to issue more loans, which contributes to an increase in the overall money supply in the economy.

When banks have more reserves and are incentivized to lend, consumers and businesses are more likely to borrow money, leading to increased spending and investment. This expansionary monetary policy is a key tool for the Federal Reserve to stimulate economic growth, especially during periods of economic downturn or sluggishness. The act of buying securities thus facilitates a direct increase in liquidity within the banking system.

The other options do not facilitate an expansion of the money supply in a direct manner. Raising taxes would likely decrease disposable income and consumer spending, thus shrinking the money supply. Decreasing interest rates, while it does encourage borrowing and spending, is generally a response or effect of expanding monetary policy rather than a method of expansion itself. Selling securities would decrease the money supply, as it takes cash out of the banking system in exchange for securities. Hence, buying securities from banks is the most effective method for