If the Bank of Canada sells securities in the open market, then:
A) the monetary base and the money supply expand.
B) the monetary base and the money supply contract.
C) the high-powered money (H) will increase.
D) the total deposits in the banking system will increase.

Question

Quizplus · Accepted Answer

When the Bank of Canada sells securities in the open market, it effectively removes money from the economy because the purchasers of these securities pay the bank, which reduces the amount of money they have to deposit in banks or to spend. This action decreases the monetary base (the total amount of a country's currency in circulation or in the central bank's reserves) and, as a consequence, the money supply contracts because there is less money circulating in the economy.

If the Bank of Canada Sells Securities in the Open