Question

when the bank of canada is concrened with inflation, it buys government securities. is the statement correct or not. explain

Answer 1

The statement is correct, when the BOC is concerned about inflation it lowers the interest rate and buys government securities(OMOs) to increase the money supply in the economy. In theory higher money supply will cause inflation to rise with output.

Central bank uses its tools to stimulate the economy when it is concerned about inflation. It lowers interest rates and increases money supply to increases aggregate demand and boosts GDP. The most commonly uses open market operations(OMOs) to increase money supply in banking system. It buys government securities from the banks and lend money that increases the reserves of banks. This excess reserves the bank can lend to the consumers and businesses to expand economic activity.

The Expansionary monetary policy is used when the economy have subdued inflation an d and there is spare capacity of output.