Question

Suppose the Bank of Canada sells bonds. We can expect this transaction to:Select one:a.reduce the money supply, increase bond prices, and lower interest rates.b.increase the money supply, lower bond prices, and lower interest rates.c.increase the money supply, raise bond prices, and lower interest rates.d.reduce the money supply, reduce bond prices, and raise interest rates.

Answer 1

When the Bank of Canada sells bonds, it pulls money out of the money market, decreasing the money supply. This action can also lower bond prices. When bond prices go down, their return or interest rates go up. So, based on this information, the correct answer would be d. reduce the money supply, reduce bond prices, and raise interest rates.

Step-by-step explanation:

Answer 2

If the Bank of Canada sells bonds, we can expect this transaction to:
Option A: reduce the money supply, increase bond prices, and lower interest rates. This is because when the Bank of Canada sells bonds, it is removing money from circulation and, therefore, reducing the money supply. As a result, this action increases demand for bonds, which drives up bond prices. Higher bond prices lead to lower interest rates as the yield on those bonds decreases. So, option A is the correct answer. Is there anything else you'd like me to help you with?