When a bank sells a government bond to the Bank of Canada, reserves in the banking system ________ and the monetary base ________, everything else held constant.

Question

Quizplus · Accepted Answer

When a bank sells a government bond to the Bank of Canada, reserves in the banking system increase because the Bank of Canada pays the bank, thereby increasing the bank's reserves. Consequently, the monetary base also increases because the monetary base includes reserves among its components.

When a Bank Sells a Government Bond to the Bank