Suppose that the Bank of Canada enters the open market and purchases $15 million of government bonds from the general public; this will:

Question

Quizplus · Accepted Answer

When the Bank of Canada purchases government bonds from the general public, it pays for these bonds by increasing the reserves of the banks where the sellers deposit their money. This action increases the monetary base (cash plus reserves) and, as a result, increases the banking system's capacity to lend. This process does not decrease bank reserves or the monetary base, nor does it limit the money multiplier; instead, it potentially increases the money multiplier effect by providing banks with more reserves to support additional lending.

Suppose That the Bank of Canada Enters the Open Market