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Discuss the mechanisms used by the Bank of Canada to influence the money supply.


Discuss the mechanisms used by the Bank of Canada to influence the money supply. Use a simple numerical example to illustrate this. What role does the reserve ratio play

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Expert Solution

Bank of Canada uses Interest rate, open market operations, cash reserve ratio and statutory liquidity ratio as tools to govern money supply in market. Reserve ratio is minimum amount of reseeves that banks need to park with central banks and thus l lower ratio lower is fund parked with central bank which helps boost liquidity into market.

By this way the credit availability becomes easier for firms and results in higher capital expenditure and thus higher profits.

Consequently wages rise and unemployment reduces causing further acceleration in consumption and aggregate demand which ultimately led to massive price rise and real GDP also rises substantially.

Rahul Sunny answered 1 year ago
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