CHAPTER Why Study Money, Banking, and Financial Markets? tion and the growth rate of the money supply: the countries with the highest inflation rates are also the ones with the highest money growth rates Belarus, Romania, Russia, and Venezuela, for example, experienced high inflation during this period, and their rates of money growth were high By contrast, Canada and the United States had low inflation rates over the same period, and their rates of money growth have been low Such evidence led Milton Friedman, a Nobel laureate in economics, to make the famous statement Inflation is always and everywhere a monetary phenomenon We look at money s role in creating inflation in Chapter 26 Money and Interest Rates In addition to other factors, money plays an important role in the interest-rate fluctuations that are of such great concern to businesses and consumers Figure 1-6 shows the changes in the interest rate on long-term Canada bonds and the rate of money growth As the money growth rate rose in the late 1970s, the long-term bond rate rose with it However, the relationship between money growth and interest rates has been less clear-cut since 1980 We analyze the relationship between money and interest rates when we examine the behaviour of interest rates in Chapter Conduct of Monetary Policy Because money can affect many economic variables that are important to the well-being of our economy, politicians and policymakers throughout the world care about the conduct of monetary policy, the management of money and interest rates The organization responsible for the conduct of a nation s monetary policy is the central bank Canada s central bank is the Bank of Canada (also called simply the Bank) In Chapters 15 18, we study how central banks like the Bank of Canada can affect interest rates and the quantity of money in the economy and then look at how monetary policy is actually conducted in Canada and elsewhere Interest Rate Money Growth Rate (M2 ++ (Gross)) 18 16 16 14 14 F I G U R E 1- 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 10 1980 12 10 1978 12 1976 Interest Rate (%) 18 M2 ++ (Gross) Money Growth (Over 12 Months) and Interest Rates (Long-Term Government of Canada Bonds), 1977 2008 Source: Statistics Canada CANSIM II Series V41552801 and V122544 Milton Friedman, Dollars and Deficits (Upper Saddle River, N.J : Prentice Hall, 1968), p 39 Money Growth Rate (% Annual Rate) 20