Suppose the actual overnight interest rate is 3.5%.If the Bank of Canada raises its target for the overnight interest rate to 4%,and longer-term interest rates in the market rise as a result,

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When the overnight interest rate increases, it becomes more expensive for commercial banks to borrow from the Bank of Canada. This leads to a decrease in the supply of loanable funds, which in turn reduces the demand for loans from commercial banks. As a result, commercial banks buy government securities from the Bank of Canada to increase their reserves and/or reduce their outstanding loans. This decreases the money supply, as the purchase of government securities reduces the amount of reserves that commercial banks have available to lend out.

Suppose the Actual Overnight Interest Rate Is 3