Draw a Venn Diagram. For "general" $A$ and $B$, the world $M$ will be divided into $4$ parts. It is fairly easy to see that using the allowed operations, we can get any set that is the union of $0$ or more of these parts. So before each part, stop and decide whether to include it. For each of the parts, there are $2$ choices, for a total of $2^4$.
The idea can be generalized to situations in which we start with $3$ sets, $4$ sets, and so on. When we start with $n$ sets, the maximum total generated is $2^{(2^n)}$, and this vaue is in general assumed.
We could think of this as an exercise in combinatorics, or as a way of making people think about what kinds of sets can be generated using the important set-theoretic operations of the problem. We could also think of it as partly an exercise in reading and understanding the rather formal language used in formulating the problem.
Added: We could use the Venn diagram as the intuitive basis behind a diagram-free approach. We will say that $X$ is a basic set if $X$ is one of $A\cap B$, $A\cap B^c$, $A^c \cap B$, or $A^c \cap B^c$, where in general $U^c$ denotes the complement of $U$ in $M$. These basic sets are pairwise disjoint. Obviously some could be empty, but for any $M$ with at least $4$ elements, it is easy to come up with $A$ and $B$ such that there are exactly $4$ non-empty basic sets.
For the formal construction, note first that in general $S_i \subseteq S_{i+1}$, since by definition if $X\in S_i$ then $X\cap X \in S_{i+1}$. It is obvious that the basic sets are constructible using our operations, and that so is any union of $0$ or more basic sets. In the generic case there are $2^4$ distinct such unions. This does not quite end things. For completeness we need to prove the intuitively obvious fact that no other subsets of $M$ are constructible.
In principle this is done by induction on the number of steps in the construction. For the base step, we observe that $A$ and $B$ are unions (possibly empty) of basic sets. For the induction step, we need to show that if any of the three fundamental operations is applied to a union of basic sets, the result is a union of basic sets. This is very easy for each of $\cup$, $\cap$, and relative complement.