Suppose the Bank of Canada sells government securities to banks.Consequently, which of the following is likely to eventually increase?
A) the price level
B) planned investment expenditures
C) aggregate demand
D) interest rates

Question

Suppose the Bank of Canada sells government securities to banks.Consequently, which of the following is likely to eventually increase?  
A) the price level 
B) planned investment expenditures 
C) aggregate demand 
D) interest rates

Quizplus · Accepted Answer

When the Bank of Canada sells government securities to banks, it removes excess reserves from the banking system. This reduces the supply of money and raises the interest rates as the cost of borrowing becomes more expensive. Higher interest rates, in turn, reduces planned investment expenditures and aggregate demand.

Suppose the Bank of Canada Sells Government Securities to Banks