Figure15-6Setting the Target for the Overnight Rate The Bank of Canada sets a target for the overnight rate and uses open-market operations to achieve that target. In both panels the target rate is i_T. In panel (a) the initial equilibrium interest rate, i₁, is above the target rate. The BOC increases the money supply by making an open-market purchase of treasury bills, pushing the money supply curve rightward, from MS₁ to MS₂, and driving the interest rate down to i_T. In panel (b) the initial equilibrium interest rate, i₁, is below the target rate. The BOC reduces the money supply by making an open-market sale of treasury bills, pushing the money supply curve leftward, from MS₁ to MS₂, and driving the interest rate up to i_T.