Question

1. When does the supply of money increase? (1 mark)

	a.	when the Bank of Canada increases the overnight rate
	b.	when the Bank of Canada makes open-market sales
	c.	when the Bank of Canada makes open-market purchases
	d.	when the Bank of Canada increases the bank rate

Answer 1

Central Banks can control the supply of money through various channels. Increase in bank rate and overnight rate decreases the liquidity in the market as taking loans becoming costlier for Banks. Sale of assets in open market means the Bank is taking money from the market and thus decreasing the money supply. When government purchases assets in the open market, it injects more money in the market and money supply increases. Therefore, option c) is correct.