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17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
17.  monetary policy
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17. monetary policy

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  • 1. monetary policy
  • 2. The bank of Canada Canada’s central bank since 1935
  • 3. Four basic functions of the Bank of Canada 1. Manages the money supply (Monetary Policy) 2.Acts as the banker’s bank 3. Acts as bank to the Federal government 4.Helps to supervise the operations of financial markets to ensure stability.
  • 4. A year after its founding, with a mandate to “promote the economic and financial welfare” and regulate its money supply, the Bank of Canada issued the first bank note series on March 11, 1935. Denominations were printed in either English or French, featuring portraits of royal family members or former prime ministers (something that is still a feature on our bank notes today), as well as themes that represented Canada. The series featured a $25 and $500 note, and raised ink, intricate patterns and small, green dots were among the security features. The $20 note featured a portrait of Princess Elizabeth (who would become reigning monarch, Queen Elizabeth II). The notes were the biggest they've ever been, measuring 152.4 by 73.025 mm.
  • 5. Tools of monetary policy 1. Setting the Bank Rate 2.Open market operations 3.Controlling the reserve ratio 4.Moral Suasion
  • 6. setting the bank rate Bank rate is interest (i) paid by chartered banks to the B of C banks use this to set their prime rate - prime rate = lowest possible i charged by banks on loans to best corporate customers
  • 7. bank rate cont’d. as prime rate varies, all other rates for all other depositors and borrowers also vary.
  • 8. open market operations The buying and selling of federal government bonds by the Bank of Canada - bonds are sold to decreases the money supply (tight money policy) - bonds are bought to increase the money supply (easy money policy)
  • 9. controlling the reserve ratio the B of C can move gov’t deposits to or from chartered banks to increase or decrease the money available for loans (and therefore the money supply).
  • 10. controlling the reserve ratio the B of C can also tell the chartered banks how much their deposits they must retain as a reserve. i.e. if $1000 is deposited in a bank they may be required to keep $100, loan out only $900
  • 11. moral suasion only used in rare circumstances - the B of C will influence or pressure the chartered banks to follow a particular policy without actually putting specific measures in place.
  • 12. types of monetary policy EASY MONEY used in the case of a recession reduce interest rates and increase the money supply. purchase gov’t bonds, increase lending ability of banks.
  • 13. types of monetary policy TIGHT MONEY used in the case of a boom/inflation increase interest rates and decrease the money supply. sell gov’t bonds, decrease lending ability of banks.
  • 14. benefits of monetary policy Is more focused on economic rather than political goals decision can be made and put into place quickly - therefore acts with much greater speed than fiscal policy.
  • 15. ...and that will make Mark Carney smile
  • 16. drawbacks of monetary policy no guarantees that it will work will affect every region of the country uniformly.
  • 17. other limitations Tight $ policies work better than easy $. - i.e. low i will not encourage spending for those uncertain about the future. -however - high i will discourage spending. Policies may affect the value of the Canadian dollar -high i - foreigners invest - buy C$, increase the value -low i - foreigners move investments - sell C$, decrease the value High i will affect the government deficit - interest rates apply to the government too.
  • 18. ...and that will make Mark Carney sad.
  • 19. Some other important terminology These are all key factors the government must consider when determining fiscal policy
  • 20. The Paradox of Thrift (Ultimately, savings will prevent savings.) peaking economy means greater ability to save. increased savings = decreased demand. economy heads toward recession. people must use up savings to survive.
  • 21. MPC and MPS Marginal Propensity to Consume What % of each added dollar of income will be spent? Marginal Propensity to Save What % of each added dollar of income will be saved?
  • 22. The Multiplier Effect The multiplied effect upon GDP that results from a change in people’s incomes.
  • 23. Spending Addition to GDP Cumulative increase in GDP First round $100 $100 $100 Second round (0.67 X100) = 67 67 167 Third round (0.67 X 67) = 45 45 212 Fourth round (0.67 X 45) = 30 30 242 Fifth round (0.67 X 30) = 20 20 262 Sixth round (0.67 X 20) = 13 13 275 300 300 etc. Total all rounds With an MPC of 0.67, an initial expenditure of $100 generates a $300 addition to the GDP through the respending process.

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