Chapter 14 introduce to the bank of Canada and monetary policy. In this chapter you will learn: The main functions of the bank of Canada, how the Bank of Canada can expand or contract the money supply, the components of money demand, how the equilibrium interest rate is determined in the money market, the mechanism by which the interest rate affects GDP.
The Bank of Canada and Monetary Policy Chapter 14 SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 In this chapter you will learn The main functions of the Bank of Canada How the Bank of Canada can expand or contract the money supply The components of money demand How the equilibrium interest rate is determined in the money market The mechanism by which the interest rate affects GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand for Money The Money Market Monetary Policy, Real GDP, & the Price Level Effectiveness of Monetary Policy Current Focus: The Overnight Loans Rate Monetary Policy & the International Economy The “Big Picture” © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 Goals of Monetary Policy to help the economy to attain a fullemployment, noninflationary level of total output… by altering the economy’s money supply and interest rates how does this work? © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 Goals of Monetary Policy Increase the money supply during a recession to stimulate spending Decrease the money supply during inflation to constrain spending © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand for Money The Money Market Monetary Policy, Real GDP, & the Price Level Effectiveness of Monetary Policy Current Focus: The Overnight Loans Rate Monetary Policy & the International Economy The “Big Picture” © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 Functions of the Bank of Canada The “Bankers’ Bank” Issuing Currency Acting As Fiscal Agent Supervising the Chartered Banks Regulating the Supply of Money © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 Bank of Canada Independence controversial voters hold Parliament responsible Bank must be protected from political pressures © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand for Money The Money Market Monetary Policy, Real GDP, & the Price Level Effectiveness of Monetary Policy Current Focus: The Overnight Loans Rate Monetary Policy & the International Economy The “Big Picture” © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 Balance Sheet Of The Bank Of Canada Table 14-1 ASSETS LIABILITIES AND NET WORTH Treasury bills of Canada Other government securities Foreign currency deposits Other assets © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 10 Table 14-2 Problem: Recessionary Gap Bank of Canada buys bonds, switches deposits to chartered banks, or both Money supply rises Reserves increase Interest rate falls Investment spending increases Aggregate demand increases Real GDP rises by a multiple of the increase © 2002 McGraw-Hill Ryerson in Ltd investment Macroeconomics, Chapter 14 63 Table 14-2 Problem: Inflationary Gap Bank of Canada sells bonds, switches deposits from chartered banks, or both Money supply falls Reserves decrease Interest rate rises Investment spending decreases Aggregate demand decreases Inflation declines © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 64 Monetary Policy, Real GDP, & the Price Level Price Level AS P3 P2 P1 AD1 Q1 © 2002 McGraw-Hill Ryerson Ltd Q2 AD2 Q3 as always, the impact of a shift in AD on real GDP and price level depends on supply AD conditions and the shape Realof GDP the AS curve Macroeconomics, Chapter 14 65 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand for Money The Money Market Monetary Policy, Real GDP, & the Price Level Effectiveness of Monetary Policy Current Focus: The Overnight Loans Rate Monetary Policy & the International Economy The “Big Picture” © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 66 Effectiveness of Monetary Policy Strengths of Monetary Policy Speed & Flexibility Isolation from Political Pressure Success During the 1980s & 1990s Shortcomings & Problems Less Control? Changes in Velocity Cyclical Asymmetry © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 67 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand for Money The Money Market Monetary Policy, Real GDP, & the Price Level Effectiveness of Monetary Policy Current Focus: The Overnight Loans Rate Monetary Policy & the International Economy The “Big Picture” © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 68 Current Focus: The Overnight Loans Rate Bank of Canada communicates changes in monetary policy by announcing changes in the bank rate The bank rate is set at the upper limit of the Bank of Canada’s operating band for the overnight loans rate © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 69 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand for Money The Money Market Monetary Policy, Real GDP, & the Price Level Effectiveness of Monetary Policy Current Focus: The Overnight Loans Rate Monetary Policy & the International Economy The “Big Picture” © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 70 Monetary Policy & the International Economy Net exports effects reinforce monetary policy © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 71 Table 14-3 Problem: recession, slow growth Expansionary monetary policy (lower interest rate) Decreased foreign demand for dollars Dollar depreciates Net exports increase Aggregate demand increases Monetary policy is reinforced © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 72 Table 14-3 Problem: inflation Contractionary monetary policy (higher interest rate) Increased foreign demand for dollars Dollar appreciates Net exports decrease Aggregate demand decreases Monetary policy is reinforced © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 73 Monetary Policy & the International Economy Macro Stability & the Trade Balance The easy money policy that is appropriate for the alleviation of unemployment & sluggish growth is compatible with the goal of correcting a balance-of-trade deficit The tight money policy used to alleviate inflation conflicts with the goal of correcting a balance-of-trade deficit © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 74 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand for Money The Money Market Monetary Policy, Real GDP, & the Price Level Effectiveness of Monetary Policy Current Focus: The Overnight Loans Rate Monetary Policy & the International Economy The “Big Picture” © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 75 The Big Picture Key graph 14-6 (see the text) integrates the various components of macroeconomic theory & stabilization policy © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 76 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand for Money The Money Market Monetary Policy, Real GDP, & the Price Level Effectiveness of Monetary Policy Current Focus: The Overnight Loans Rate Monetary Policy & the International Economy The “Big Picture” © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 77 ... Ltd Macroeconomics, Chapter 14 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand... McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 14 Chapter 14 Topics Goals of Monetary Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy. .. Policy Functions of the Bank of Canada Consolidated Balance Sheet of the Bank of Canada Tools of Monetary Policy The Demand for Money The Money Market Monetary Policy, Real GDP, & the Price Level