Question

If the Bank of Canada sells bonds worth $1M and the banks reduce

their borrowings from the Bank of Canada by the same amount, what
will be the effect of this decision on the money supply?

Answer 1

When the Bank of Canada sells bonds and banks reduce their borrowings by the same amount, it leads to a decrease in the money supply.

Step-by-step explanation:

When the Bank of Canada sells bonds worth $1M and the banks reduce their borrowings from the Bank of Canada by the same amount, it will lead to a decrease in the money supply. This is because when the Bank of Canada sells bonds, money flows from the banks to the central bank, reducing the quantity of money in circulation. As a result, the banks will have less money to lend out, leading to a decrease in the money supply.