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

Question

Quizplus · Accepted Answer

When a bank buys a government bond from the Bank of Canada, it pays for the bond by reducing its reserves. This decreases the reserves in the banking system. Since the Bank of Canada is the central bank, the monetary base also decreases as the reserves are part of the monetary base.

When a Bank Buys a Government Bond from the Bank