Suppose that the Bank of Canada purchases $40 million of government securities on the open market. This open market operation will cause the money supply to:

Question

Quizplus · Accepted Answer

When the Bank of Canada purchases government securities on the open market, it pays for these securities by increasing the reserves of banks. This initial injection of money serves as a base for banks to extend more loans, creating a multiplier effect on the money supply. Therefore, the money supply expands by more than the initial $40 million due to both primary effects (the initial purchase) and secondary effects (subsequent lending by banks).

Suppose That the Bank of Canada Purchases $40 Million of Government