You are the Governor of the Bank of Canada, which has recently decided to increa

Question

You are the Governor of the Bank of Canada, which has recently decided to increase the money supply using open-market operations. During a press conference after the decision a reporter asks you to explain what open-market operations are and how you will use them to increase the money supply. You reply: Open market operations occur when a central bank either purchases or sells government securities. To increase the money supply the central banks sells government securities, which increases the amount of reserves in the banking system and fuels deposit expansion. Open market operations occur when a central bank either purchases or sells government securities. The central bank increases the money supply by purchasing securities and reduces the money supply by selling securities. Open market operations work by changing the amount of excess reserves available in the banking system. Open market operations refer to manipulating the rate at which the BOC loans to member O banks. Increasing the money supply occurs when the BOC increases this rate, which decreases the amount of required reserves in the banking system. Open market operations alter reserve requirement up or down. The money supply will increase when we use Open market operations to decrease the reserve requirement.

Explanation / Answer

B is the answer

Here central bank has to purchase government bonds to increase money supply, Central bank is the nodal agency for the money so you must know that central bank is the agency that has most money with it. Government bonds are one of the instruments that fed can buy as long term debt of us government. Fed later on can even sell these bonds to foreign governments.

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