11.4 Supply of Money

The Bank of Canada regulates the supply of money. Therefore, we graphically represent the supply of money as a vertical line. The interest rate does not affect the quantity of money supplied. Rather the BoC controls the money supply that consequently influences the interest rate.

When the Bank of Canada wants to increase the supply of money, the MS curve shifts rightward from [latex]MS_0[/latex] to [latex]MS_1[/latex]. Recall that the Bank conducts an open market operation of purchasing securities when they want to increase the money supply in the economy. Conversely, when the Bank of Canada wants to decrease the supply of money, the MS curve shifts leftward. Recall that the Bank conducts an open market operation of selling securities when they want to decrease the money supply in the economy.