Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term interest rates in the market fall as a result.When this occurs,the commercial banks respond to

Question

Quizplus · Accepted Answer

When the Bank of Canada lowers its target for the overnight interest rate and longer-term interest rates fall, it makes borrowing cheaper for commercial banks. As a result, banks respond by increasing the supply of credit, which they can do by selling government securities to the Bank of Canada in exchange for cash. With the cash they receive, commercial banks can extend new loans to borrowers who want to take advantage of the lower interest rates. Therefore, the best choice is B.

Suppose the Bank of Canada Lowers Its Target for the Overnight