Question

using the money supply and money demand model, an open market purchase of government bonds by the bank of canada would cause the equilibrium interest rate to:__.

Answer 1

An open market purchase of government bonds by the Bank of Canada would lower the equilibrium interest rate by increasing the money supply, which in turn stimulates investment and impacts the exchange rate.

Step-by-step explanation:

Using the money supply and money demand model, an open market purchase of government bonds by the Bank of Canada would cause the equilibrium interest rate to decrease. When the central bank, like the Bank of Canada, purchases government bonds, it increases the reserves of the banks that sold the bonds. Those banks can then loan out more money, expanding the money supply throughout the economy. This expansion shifts the money supply curve to the right in the money market diagram, leading to a lower equilibrium interest rate. A lower interest rate stimulates investment and can also affect the exchange rate, which may in turn encourage net exports.