Which of the following best describes the consequences of open market sales conducted by the Bank of Canada?
A)Bank reserves increase and the money supply increases.
B)Bank reserves increase and the money supply decreases.
C)Bank reserves decrease and the money supply increases.
D)Bank reserves decrease and the money supply decreases.

Question

Quizplus · Accepted Answer

When the Bank of Canada conducts open market sales, it sells government securities to banks and other financial institutions. In exchange, the Bank of Canada receives payment in the form of bank reserves. This means that bank reserves decrease as a result of open market sales. Since bank reserves are a component of the money supply, a decrease in bank reserves leads to a decrease in the overall money supply. Therefore, the consequences of open market sales are a decrease in bank reserves and a decrease in the money supply.

Which of the Following Best Describes the Consequences of Open