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 lower bank rate (decreases/increases) banks’ incentives to borrow reserves from the Bank of Canada, thereby (reducing/increasing) the quantity of reserves in the banking system and causing the money supply to (fall/rise)
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 buy government bonds, the quantity of reserves in the banking system (increases/decreases), banks’ demand for borrowed reserves (declines/rises), and the overnight rate (increases/decreases)
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