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Monetary Policy
Government Policy
Monetary
Fiscal
Expansionary
Restrictive
Expansionary
Contractionary
Policies designed by Bank of Canada that increase the money supply to lower interest rates and expand real GDP
The ultimate goal
Steps
Lower overnight lending rate Bank of Canada will announce a lower target for the overnight loans rate
Bank of Canada buys bonds from banks and the public Result--- increase in the reserves in the banking system
Example 1:
Year Ago Quarter Real GDP Consumer Price Index $3049 287 Last Quarter $2678 253 Estimate for Quarter Now Ending $2588 232
Unemployment Rate
6%
11%
15%
c) How would the policy help this country to achieve its goals?
The increase in money supply results decrease in interest rate; thus, investment would increase, causing real GDP to increase and bring the economy to equilibrium.
It is a reference point for determining other interest rates charged on business and individuals. Ex. mortgage rate Higher than overnight lending rate Fluctuates with overnight lending rate and bank rate
Policies designed by Bank of Canada that restrict the growth of the nations money supply to reduce or eliminate inflation
The ultimate goal
Steps
Higher overnight lending rate Bank of Canada will announce a higher target for the overnight loans rate
Bank of Canada sells bonds from banks and the public Result--- decrease in the reserves in the banking system
Example 2:
Year Ago Quarter Real GDP Consumer Price Index $2560 230 Last Quarter $2742 250 Estimate for Quarter Now Ending $2985 270
Unemployment Rate
12%
9%
7%
c) How would the policy help this country to achieve its goals?
By decreasing the money supply in reserves, the interest rate increases and results decrease in investment and consumption, and ultimately reduce inflation.
Inflation declines
Monetary Policy
Fiscal Policy
Political pressure
Practice Question:
1. If the economy is experiencing a sharp recession trend, what changes would you suggest to do? How would the policy affect the money supply and chartered bank cash reserves?
Suggesting Expansionary Monetary Policy.
As government buying bonds from banks, money from Central Bank is going to the chartered banks, as a result, increase banks reserves and money supply. The increase in money supply would lower the interest rate, causing investment increase, thus, the real GDP would also increase.
2. What would the government do if the economy is in a sharp inflation? What policy is used? What happens to the bank reserves and money supply?
The government would SELL bonds to banks and publics. Restrictive Monetary policy is used, resulting decrease in money supply and bank reserves. Because of the decrease in money supply, the interest rate would increase, thus, decrease in investment and reduce inflation.
Summary
Expansionary Monetary Policy
Used in a recession Government buys bonds from chartered banks Money supply= Interest rate= Investment = AD = Real GDP