Question

How can the bank of canada increase the money supply?

a. by conducting open-market sales and raising the bank rate
b. by conducting open-market sales and lowering the bank rate
c. by conducting open-market purchases and lowering the bank rate
d. by conducting open-market purchases and raising the bank rate

Answer 1

The Bank of Canada can boost the money supply by conducting open-market purchases, which injects reserves into the banking system, and by lowering the bank rate, which encourages banks to borrow more and lend more to their customers.

Step-by-step explanation:

The Bank of Canada can increase the money supply through a couple of methods. One of these is by conducting open-market purchases of securities, which adds reserves to the banking system, thereby increasing the money supply. They could also lower the bank rate or discount rate, encouraging banks to borrow more reserves from the central bank, which also leads to an increase in the money supply because banks have more money to lend to their customers. So, the correct option for the student's question would be by 'conducting open-market purchases and lowering the bank rate' (option c).