Question

When the Bank of Canada increases the bank rate, commercial banks are ____ reserves and this...

When the Bank of Canada increases the bank rate, commercial banks are ____ reserves and this in turn causes the money supply to ____.

a. discouraged from borrowing, contract

b. encouraged to borrow, expand

c. discouraged from borrowing, expand

d. encouraged to borrow contract

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Answer #1

Ans.a) discouraged from borrowing, contract

when the bank of Canada increases the bank rate (i.e. this is the rate at which Bank of Canada lends to the commercial banks and financial institutions), commercial banks are discouraged from borrowing because the bank rate is greater than the overnight interest rate ( i.e. this is the rate at which commercial banks charge for loan among themselves) that means commercial banks have to pay more to Bank of Canada for borrowing and cost of loan they charge to the public will also increase and this leads to falling in money supply in the economy.

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