When the overnight rate is less than the overnight rate target,settlement balances are in ________ and the Bank of Canada will ________ Government of Canada bonds and ________ them at a predetermined price the next business day.
A) deficit;buy;sell
B) deficit;sell;buy
C) surplus;buy;sell
D) surplus;sell;buy
E) equilibrium;buy;sell

Question

Quizplus · Accepted Answer

When the overnight rate is less than the overnight rate target, it indicates a surplus of settlement balances. In this case, the Bank of Canada will sell Government of Canada bonds to remove the excess funds and bring the overnight rate closer to the target rate. The next business day, the Bank will repurchase these bonds at a predetermined price, which is known as a reverse repo or a sale and repurchase agreement. Therefore, the correct answer is D, where the settlement balances are in surplus, and the Bank of Canada will sell government bonds and repurchase them at a pre-determined price on the next day.

When the Overnight Rate Is Less Than the Overnight Rate