If the Federal Reserve intends to increase interest rates, which action might they take?

When the Federal Reserve intends to increase interest rates, one of the primary actions they may take is to sell government securities. Selling these securities reduces the amount of money circulating in the economy because when the Fed sells them, buyers pay for these securities, effectively transferring their funds to the Fed. This process decreases the reserves of banks, leading to less available money for lending.

As banks have reduced reserves, they may need to raise the interest rates they charge for loans in response to decreased liquidity. The effect here is a tightening of monetary policy, which leads to higher overall interest rates throughout the economy.

The other options involve actions that would not result in an increase in interest rates. For instance, buying government securities (as noted in one of the choices) would inject liquidity into the banking system, thereby lowering interest rates. Decreasing the reserve requirement would also increase bank reserves, further encouraging lending and reducing rates. Likewise, a decrease in the prime lending rate would signal lower borrowing costs, which is contrary to the intention of raising interest rates.