Question

Explain how the Bank of Canada implements open market operations to achieve price stabilization.

Answer 1

Bank of Canada is the central bank of Canada that has treasury bills as a government security to be used in open market operations (OMO) to bring price stability in the economy of Canada. When there is an inflation increase or inflation goes ahead of the inflation rate target, then bank of Canada, sells the treasury bills in the open market. It sucks out the money from the economy and money supply decreases. It leads to increase in interest rate and discouragement to the consumers and firms. As a result, price level decreases and comes to the level of inflation rate target. Hence, price stability is achieved.

On a similar note, when price falls, then bank of Canada, buys the treasury bills from the market to inject the money and decrease the interest rates. It will lead to increased level of consumption and investment spending. As a result price level rises to the desired level. It helps to achieve the price stability again.