a) When the Bank of Canada sells the government bonds to a commercial bank, the commercial bank experiences a decline in reserves and in increase in bonds. Total assets are unchanged; this is just a portfolio switch between bonds and cash.

b) The Bank of Canada has sold a bond and so its assets fall by $100 000. In return, the Bank of Canada receives $100 000 cash that is no longer “in circulation” and thus is no longer a liability for the Bank.

c) The amount of currency in circulation has fallen-because the commercial bank used this currency to purchase the bonds from the Bank of Canada. Once this cash is inside the Bank of Canada, it is no longer in circulation in the Canadian economy.