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Monetary policy is a critical tool used by central banks to address macroeconomic issues. It involves the management of the money supply and interest rates to control inflation, stabilize the currency, and promote economic growth. This article will delve into how monetary policy is used to achieve these goals, focusing on the Bank of Canada’s approach. Monetary Policy Tools The Bank of Canada uses several tools to manage the money supply: Reserve Requirement : This is the minimum amount of funds that a bank must hold in reserve against its deposit liabilities. Lowering the reserve requirement expands the money supply as it frees up excess reserves, allowing banks to lend more. Conversely, raising the reserve requirement reduces the money supply as banks have less money to lend out. Open Market Operations : This involves the buying and selling of government securities. When the Bank of Canada buys securities, it increases the money supply as it adds to the reserves in the banking system...