1. How does the Bank of Canada’s open market operation of purchasing bonds from chartered banks...

1. How does the Bank of Canada’s open market operation of purchasing bonds from chartered banks effect the individual components of the GDP = C+I+G+X-M?

Expert Solution

When the Bank of Canada's purchasing bonds from chartered banks it increase the reserves of chartered banks. It increases the bank's ability to give loan or credit at lower interest rate. When banks reduces the interest rate it increase the money supply in the economy. Because more people ready to take credit at lower interest rate.

The increase in the money supply will lead to an increase in consumer(C) spending because at lower interest rate the consumer consume more and fulfill their needs which earlier they are not able to fulfil because of higher interest rate. The increase in money supply also increases the Investment(I) of the people, because at lower interest rate the ready to take more credit to set up new business, start's up etc.

When Consumer spending and investment rises it cause to increase in aggregate demand due to which aggregate demand shift right. When aggregate demand shift right it increases the nominal output, or Gross Domestic product. So we can say that increase in money supply is equal to increase in nominal output of GDP.

Rahul Sunny answered 1 year ago

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