The Bank of Canada is in charge of all money supply. ◦ Regulates the amount of money in the system.
3 Main tasks: ◦ Acts as the government’s banker by clearing federal government cheques ◦ Bank holds some of the government’s bank deposits and decides where the other deposits should be held ◦ Handles the financing of the federal government’s debt by issuing bonds.
Canada Savings Bonds: Federal government bonds that have a set value throughout their term.
Treasury Bills: Short-term federal government bonds that provide no interest, but are sold at a discount.
Bank of Canada is also in charge of the stability of chartered banks. ◦ This is called Monetary Policy
Two different kinds: ◦ Expansionary Monetary Policy ◦ Contractionary Monetary Policy
A policy of increasing money supply and reducing interest rates to stimulate the economy. ◦ If real out put falls a recessionary gap is created and expansionary monetary policy is used.
When in action: When nominal interest falls businesses respond by increasing their investment spending and households purchase more durable goods, raising consumption. ◦ If consumption totalled $9 billion and value of economy’s spending multiplier is 1.67 then total change in AD is $15 billion.
A policy of decreasing the money supply and increasing interest rates to dampen economy. ◦ Happens during an economy boom. Done to disable investments and causes a reduction in spending. ◦ Same example as before but a decrease in $9 billion will result in a decrease of $15 billion.
3 different tools to conduct policies: ◦ Open Market Operations ◦ Government Deposits ◦ The bank rate.
Is the buying and selling of bonds by the Bank of Canada. ◦ Selling bonds reduces cash reserves and decreases money supply. ◦ Buying of bonds increases money supply.
Moving federal government deposits from Bank of Canada to chartered banks, the Bank of Canada conducts expansionarry policy. And Vice Versa.
Interest paid by members of Chartered Banks when they receive Bank of Canada advances. Overnight Rate: the interest rate on overnight loans between chartered banks and other financial institutions.
Bank buys bonds or moves government deposits to Chartered banks then the Bank increases in value which reduces overnight borrowing. ◦ Vice-Versa.
2 main beneftis: ◦ Separation from politics ◦ Speed
Unlike fiscal policy, because it is controlled by an appointed member and is secretive then policy is focused on economic goals rather than political.
Monetary policy decisions can be made very quickly compared to fiscal policy.
Two major drawbacks: ◦ Relative weakness as expansionary tool ◦ Broad impact
Using expansionary policy cannot guarantee it will translate into more bank loans and an expansion of money supply.
Monetary affects every region instead of only being focused on one.
Both monetary and fiscal policy used to control these issues. Demand-Pull Inflation: inflation that occurs as increased aggregate demand pulls up prices.
Philips Curve: a curve expressing the assumed fixed and predictable inverse relationship between unemployment and inflation. According to Keynesian perspective if an economy with an inflation rate of 2 percent and an unemployment rate of 8 percent experiences demand-pull inflation, the inflation rate will rise as the same time unemployment decreases.
An increase in aggregate demand creates shortages in labour market, which puts upward pressures on wages, thereby boosting inflation. Decrease increases unemployment. Used by governments to determine how policies will effect economy.