How does a sale of securities (open market operations) by the Bank of Canada affect the...

How does a sale of securities (open market operations) by the Bank of Canada affect the real GDP and price level? Use either three graphs or a flow chart to demonstrate this.

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Expert Solution

The Bank of Canada can affect the money supply by buying or selling Canada government securities, using open market operations. When the Bank of Canada sale the government security from the public,

This will first increases the supply of bonds/securities in the market which lead to decrease the price of bonds in the market as the price of bond falls interest rate rises [ as bond price and interest are inversely related], when interest rises people will start buying more bonds and keeping less cash with themselves which means that the Supply of money fall ( shift to the left) and as money supply fall the Aggregate demand Fall which leads to fall in real GDP and also decrease the price level.

Rahul Sunny answered 1 year ago

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