4. The bank rate and the overnight rate The bank rate is the interest rate on lo

Question

4. The bank rate and the overnight rate The bank rate is the interest rate on loans that the Bank of Canada makes to banks. Banks occasionally borrow from the Bank of Canada when they find themselves short on reserves. A higher bank rate incentives to borrow reserves from the Bank of Canada, thereby banking system and causing the money supply to banks' the quantity of reserves in the The overnight rate is the interest rate that banks charge one another for short-term (typically overnight) loans. When the Bank of Canada uses open-market operations to sell government bonds, the quantity of reserves in the banking system banks' demand for borrowed reserves , and the overnight rate

Explanation / Answer

1 A higher bank rate lowers to borrow as it increases the opportunity cost of borrowing.

2.This will reduce the quantityof reserves as bank cannot borrow from central bank

3.Money supply will decrease because borrowing by banks will be reduced.

4. reserves will increase because central banks sell it will bring back money to banks money supply decreases

5 Demand for borrowed reserves increases, because bank rate decreases

6 the overnight rate increases

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