Questions: If the Bank of Canada wanted to reduce inflation, it could Select one: a. decrease the reserve requirement or implement an open market sale. b. increase the reserve requirement or implement an open market purchase. c. increase the reserve requirement or implement an open market sale. d. decrease the reserve requirement or implement an open market purchase.

The answer is C: increase the reserve requirement or implement an open market sale.

Explanation for each option:

a. Decrease the reserve requirement or implement an open market sale.

• This option is incorrect because decreasing the reserve requirement would increase the money supply, which could potentially lead to higher inflation. An open market sale, on the other hand, would reduce the money supply, which is a correct measure to reduce inflation. However, the combination of these two actions is contradictory.

b. Increase the reserve requirement or implement an open market purchase.

• This option is incorrect because while increasing the reserve requirement would reduce the money supply and help reduce inflation, an open market purchase would increase the money supply, which could lead to higher inflation. Again, the combination of these two actions is contradictory.

c. Increase the reserve requirement or implement an open market sale.

• This option is correct because both actions would reduce the money supply. Increasing the reserve requirement means banks have to hold more reserves and can lend out less money, which reduces the money supply. An open market sale involves the central bank selling government securities, which also reduces the money supply as buyers pay for these securities with their bank deposits.

d. Decrease the reserve requirement or implement an open market purchase.

• This option is incorrect because both actions would increase the money supply. Decreasing the reserve requirement allows banks to lend out more money, and an open market purchase involves the central bank buying government securities, which increases the money supply. Both actions could lead to higher inflation, not reduce it.