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

Question

Quizplus · Accepted Answer

When the Bank of Canada sells a government bond to a bank, the bank pays for the bond, which decreases the reserves in the banking system. Since the monetary base consists of reserves plus currency in circulation, a decrease in reserves leads to a decrease in the monetary base, everything else held constant.

When the Bank of Canada Sells a Government Bond to a Bank