When the Bank of Canada lowers the operating band for the overnight interest rate, it ________.
A) lowers the bank rate by the same amount
B) encourages LVTS participants to borrow reserves either from each other or from the Bank of Canada
C) it reduces the monetary base and ultimately the money supply
D) A and B only.

Question

Quizplus · Accepted Answer

When the Bank of Canada lowers the operating band for the overnight interest rate, it also lowers the bank rate by the same amount. This is an incentive for LVTS participants to borrow reserves either from each other or from the Bank of Canada, as borrowing becomes cheaper. This increases the money supply and ultimately leads to a reduction in the overnight interest rate. Therefore, the correct choice is D.

When the Bank of Canada Lowers the Operating Band for the Overnight