When the Bank of Canada decreases bank's reserves through an open-market operation:

Question

Quizplus · Accepted Answer

When the Bank of Canada decreases bank's reserves through an open-market operation, the monetary base decreases as well. This leads to a decrease in loans and the money supply, as banks have less money to lend out. Therefore, choice D is the correct answer. Choice A is incorrect because deposits would not increase and currency in circulation may or may not increase depending on the specific situation. Choice B is incorrect because the money multiplier would decrease, leading to a decrease in the money supply, rather than an increase. Choice C is incorrect because loans would not necessarily increase, and the overnight rate and bank rate could potentially move in either direction depending on other factors.

When the Bank of Canada Decreases Bank's Reserves Through an Open-Market