What should the Bank of Canada do if it wished to reduce the lending of the commercial banks

• B) Take actions to increase the reserves of the commercial banks.

Explanation:

RESERVES - This is the amount of money in commercial banks that is held and not for lending out.

Excess reserves - The amount of money available to the commercial bank, above what it is supposed to hold and hence can lend out.

There are three possible ways the central back (Bank of Canada) can reduce lending of commercial banks

• By increasing funds rate/interest rates: When interest rates goes up for the commercial banks, it reduces the demand for loans
• By increasing reserves - Reserves are the amount of money that the commercial banks are supposed to hold in their vault and not lend out. When central bank wants to increase reserves, the commercial banks will have less amount to lend out to borrowers
• By selling government securities and bonds: When the central bank sells bonds and securities to the commercial banks, it reduces the available reserves which in turn decreases how much the commercial banks can lend out.