If the Bank of Canada conducts open-market purchases, how do the money supply and the aggregate demand change?
A) The money supply increases, and aggregate demand shifts right.
B) The money supply increases, and aggregate demand shifts left.
C) The money supply decreases, and aggregate demand shifts right.
D) The money supply decreases, and aggregate demand shifts left.

Question

Quizplus · Accepted Answer

Open-market purchases by the Bank of Canada increase the money supply by injecting new cash into the system. This increase in money supply lowers interest rates, making it cheaper for consumers and businesses to borrow money, which increases their demand for goods and services. This increase in demand shifts the aggregate demand curve to the right. Therefore, the correct choice is A.

If the Bank of Canada Conducts Open-Market Purchases, How Do