1. Explain how the Bank of Canada can influence interest rates and the money supply in Canada. Be specific about the tools that are available to the Bank for such purposes. Explain how these tools would be used for expansionary policy.
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The Bank of Canada influences the money supply in Canada by setting its official interest rates. The money supply (M1) then changes in response to the change in interest rates. The interest rate that the Bank targets is the overnight rate. The overnight rate is the interest rate that major banks charge each other for overnight loans.
The monetary policy in Canada is conducted by changing the Bank's key policy rate which in turn sets off a series of similar changes in market interest rates. The Bank of Canada's key policy rate is its overnight rate target which is the rate that the Bank wants to prevail in the market. Announcements regarding the official rate are made on eight fixed, or pre-specified, dates each year. The Bank of Canada sets an ...
The solution discusses the conduct of monetary policy by Bank of Canada. It explains how the Bank of Canada can influence interest rates and the money supply in Canada.