Final answer:
The funds that a commercial bank borrows from the Bank of Canada are called borrowed reserves, which are used to meet reserve requirements or manage liquidity and can influence the federal funds rate.
Step-by-step explanation:
When a commercial bank borrows money from the Bank of Canada, these funds are referred to as borrowed reserves. Commercial banks, in order to meet reserve requirements or manage liquidity, sometimes need to borrow from the central bank.
The Bank of Canada acts as a lender of last resort for financial institutions that require funds on a short-term basis. Borrowing from the central bank can influence the federal funds rate, which is the interest rate at which banks lend funds to one another on an overnight basis. This short-term lending is crucial for maintaining the stability and liquidity of the banking system.
When a commercial bank borrows money from the Bank of Canada, these funds are typically referred to as "central bank reserves." This borrowing mechanism allows commercial banks to bolster their liquidity and meet reserve requirements. The central bank reserves act as a foundation for the banking system, influencing the money supply and interest rates.
This interbank lending ensures stability within the financial system, enabling commercial banks to manage short-term funding needs. The interest rates set by the central bank influence broader economic conditions, affecting borrowing costs and economic activity. In essence, these borrowed funds play a pivotal role in regulating the money supply and fostering financial stability.