Question

Back to Aset Attempts: Average: 2 2. The Bank of Canada and the money supply Suppose the money supply (as measured by chequable deposits) is currently $900 billion. The required reserve ratio is 30%. Banks hold $270 billion in reserves, so there are no excess reserves. The Bank of Canada wants to increase the money supply by $10 billion, to $910 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the simple money multiplier If the Bank of Canada wants to increase the money supply using open-market operations, it should government bonds S billion worth of Canadian If the Bank of Canada wants to increase the money supply by adjusting the required reserve ratio, it should the required reserve ratio. Grade it Now Save & Continue Continue without saving

Answer 1

If bank of Canada wants to increase the money supply using open market operations it should purchase $10billion worth of Canadian government bonds. By using open market operation, government can expand and contract the money supply. Through expansion, government purchases bonds and increase the money supply.

If bank of Canada wants to increase the money supply using the requires reserve ratio, it should reduce the required reserve ratio. By reducing the reserve ratio, banks can increase the amount of money that can be given as loans and hence, it can in turn increase the money supply.