Which of the following will tend to increase bank reserves?
A)the purchase of bonds in the open market by the Bank of Canada
B)federal tax collections
C)an increase in the target overnight rate
D)the sale of bonds in the open market by the Bank of Canada
E)a budget deficit by the federal government

Question

Quizplus · Accepted Answer

When the Bank of Canada purchases bonds in the open market, it injects new money into the banking system. This increases the amount of reserves held by banks and expands the money supply.

Answer: B
 When federal tax collections are made, the funds are deposited into government accounts at banks. This increases the amount of reserves held by banks, as the funds cannot be immediately spent and instead sit in deposit accounts.

Answer: D
 When the Bank of Canada sells bonds in the open market, it withdraws money from the banking system. This reduces the amount of reserves held by banks and can lead to a contraction in the money supply.

Answer: E
 A budget deficit by the federal government involves increased spending relative to tax revenues, leading to an increase in government borrowing. This can result in the issuance of new bonds, which can be purchased by banks and increase their holdings of reserves.

Answer: C
 An increase in the target overnight rate by the Bank of Canada generally leads to a reduction in the amount of reserves held by banks. This is because banks are less likely to seek out short-term loans from other banks if the overnight rate is higher, reducing the amount of reserves exchanged in the overnight market.

Which of the Following Will Tend to Increase Bank Reserves