When the Bank of Canada sells government bonds, how do the reserves of the banking system change and what happens to the money supply?
A) The reserves increase, so the money supply increases.
B) The reserves increase, so the money supply decreases.
C) The reserves decrease, so the money supply increases.
D) The reserves decrease, so the money supply decreases.

Question

Quizplus · Accepted Answer

When the Bank of Canada sells government bonds, it takes money out of the banking system in exchange for the bonds. This action decreases the reserves of the banking system. With less reserves, banks have less base to create loans, which decreases the money supply.

When the Bank of Canada Sells Government Bonds, How Do