Suppose the Bank of Canada sells Canadian government securities in order to drain reserves from banks.Which of the following will probably occur?

Question

Quizplus · Accepted Answer

When the Bank of Canada sells government securities, it drains reserves from banks, leading to a decrease in the supply of money in the economy. As the supply of money decreases, competition among banks for the remaining reserves increases, leading to a rise in the interest rate. This increase in interest rate makes borrowing more expensive, leading to a decrease in quantity of money demanded by businesses and individuals. Therefore, the correct answer is B.

Suppose the Bank of Canada Sells Canadian Government Securities in Order