If the Federal Reserve were to buy government securities, what is likely to happen to the money supply?

When the Federal Reserve purchases government securities, it engages in an open market operation that increases the money supply. This process works as follows: the Federal Reserve buys securities from financial institutions, which adds money to those institutions' reserves. As a result, banks have more capital to lend, stimulating economic activity.

When banks increase their lending, more money circulates in the economy, leading to a higher overall money supply. This action is often taken to lower interest rates and promote economic growth, especially during times of economic downturn. Therefore, an increase in the money supply directly corresponds to the Federal Reserve's purchasing of government securities, making this the correct understanding of the concept.

In contrast, the other options do not accurately reflect the nature of this action. A decrease in the money supply would occur if the Federal Reserve were to sell government securities, which would take money out of circulation. Stabilizing the money supply implies that there are no significant changes occurring, which does not align with the direct impact of buying securities. Appreciation typically refers to an increase in the value of currency or assets, which is not a direct effect of such actions on the overall money supply.