Post on 31-Mar-2015
CIA4U0Analyzing Current Economic Issues
Chapter 12: Monetary PolicyTopic 4: Monetary Policy at Work in
the Economy
P 276-279
Monetary Policy at WorkIntroduction
How Monetary Policy Works The Bank of Canada’s Recent Record
Monetary Policy at WorkHow Monetary Policy Works
Current situation: Recession AD crosses the AS line on the
flat/level part to left of the curve Need to move the AD line to the right
(increase demand) Bank of Canada lowers interest rates
and signals an easing of the money supply
Monetary Policy at WorkHow Monetary Policy Works
This will cause 4 things: Stage 1-Government moves deposits to
the Banks giving them more money and incentive to lower interest rates in order to attract more customers
Stage 2-Consumers borrow more to buy big ticket items; Business responds, invests more in expansion, plant & equipment
Monetary Policy at WorkHow Monetary Policy Works
Stage 3-Expanded business is now producing more, continued expansion of the money supply allows consumers to buy this output
Stage 4-Cycle continues-AD moves to the right until it gets to the FE point on the AS line (where the up-turn starts)
Monetary Policy at WorkHow Monetary Policy Works
Reverse occurs during periods of inflation
Bank of Canada tightens the money supply and raises interest rates
People spend less, companies produce less, clear surplus inventories
AD (and prices) drop until AD crosses at the FE point
Monetary Policy at WorkThe Bank of Canada’s Record So Far
A stable economy requires that it’s participants remain calm
In order to be calm, people need to be well informed
The BoC and the Government work hard to make sure that people know what is going on and how to respond
Last 15 years has been relative stable Low interest rates also caused the low
value of the Canadian dollar