Final answer:
Interest rates decrease when the Bank of Canada conducts open market operations to increase bank reserves, enhancing the supply of money and credit, causing competition among lenders, which lowers interest rates.
Step-by-step explanation:
A decrease in interest rates occurs when the Bank of Canada engages in monetary policy actions, such as open market operations, to increase bank reserves. This change affects the supply curve of loanable funds, leading to more available credit and a larger supply of money. Consequently, there are more individuals or entities willing to lend, which results in competition among lenders to offer loans at lower rates, hence pushing the interest rate down. When the central bank supplies more reserves, it intends for the interest rates to adjust until they align with its target rate. This is essentially how the central bank manipulates interest rates to manage economic activity.