Question

Which statement best describes the outcomes of open-market purchases conducted by the bank of canada?

a. eserves increase, and the money supply
b. reserves increase, and the money supply
c. bank of canada borrows from member banks, which increases the money
d. bank of canada lends money to member banks, which decreases the money supply.

Answer 1

Open-market purchases by the Bank of Canada involve buying bonds from individual banks, leading to increased reserves and money supply, as banks may loan out the additional reserves, which expands the money supply further.

Step-by-step explanation:

When the Bank of Canada conducts open-market purchases, it buys bonds from individual banks. This action results in an increase in bank reserves and an increase in the money supply in the economy.

For example, if the Bank of Canada purchases $20 million in bonds from a bank such as Happy Bank, that bank's reserves increase by the amount of the purchase due to the money flowing into the bank from the central bank. Consequently, Happy Bank may loan out the extra reserves, which leads to an expansion in the overall money supply as these new loans circulate through the banking system, ultimately triggering a money multiplier effect.