Question

When the Bank of Canada buys government bonds, how do the reserves of the banking system...

When the Bank of Canada buys government bonds, how do the reserves of the banking system change and what happens to the money supply?

a. The reserves increase, so the money supply decreases. b. The reserves decrease, so the money supply decreases. c. The reserves increase, so the money supply increases. d. The reserves decrease, so the money supply increases.

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Answer #1
  • There is generally two type of monetary policy that is adopted by the central bank that is expansionary monetary policy and contractionary monetary policy
  • if the goal of the economy is to increase the money supply and reserves by lowering the interest rate the the bank and also adopts for the expansionary monetary policy
  • opposite to it is contractionary monetary policy in which the goal is to decrease the money supply
  • in case of expansionary monetary policy the bank of Canada will buy the government securities
  • in case of contractionary monetary policy the vank will sell the government bond or securities
  • Hence the correct answer is option C
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