According to liquidity-preference theory, what action taken by the Bank of Canada would shift the money-supply curve?
A) if the Bank of Canada engaged in arbitrage
B) if the Bank of Canada changed the inflation rate
C) if the Bank of Canada changed the exchange rate
D) if the Bank of Canada engaged in open-market transactions

Question

Quizplus · Accepted Answer

According to the liquidity-preference theory, changes in the money supply are brought about by changes in the willingness of banks to hold reserves. The Bank of Canada can influence the willingness of banks to hold reserves through open-market transactions, which involve buying or selling government securities in the market. When the Bank of Canada buys government securities, banks have more reserves, which increases the money supply. Conversely, when the Bank of Canada sells government securities, banks have fewer reserves, which decreases the money supply. Therefore, engaging in open-market transactions would shift the money-supply curve.

According to Liquidity-Preference Theory, What Action Taken by the Bank