Transcript What the Bank of Canada Tries to Do

What the Bank of
Canada Tries to Do
Monetary Policy

Process by which the government affects the
economy by influencing the expansion of money
and credit

How is this done?

Economic prosperity?

Economic downswing?
Types of Monetary Policies
Easy money
-
Monetary policies of low interest rates, easy
availability of credit and growth of the money
supply
-
Can be used to curb recessions
Types of Monetary Policies
Tight Money
-
High interest rates, more difficult availability of credit and decrease in the
money supply
-
Used to restrain economy in times of expansion
*Visual from yesterday
Let’s Decide on Policy
Increase or Decrease?
Item
Consumer Spending
Business Investment
Interest Rates
Bank Lending
Money Supply Growth
Inflation
Unemployment
Easy Money
Tight Money
Item
Easy Money
Tight Money
Consumer Spending
Increase
Decrease
Business Investment
Increase
Decrease
Interest Rates
Decrease
Increase
Bank Lending
Increase
Decrease
Money Supply Growth Increase
Decrease
Inflation
Increase
Decrease
Unemployment
Decrease
Increase
The Role Of Interest Rates

Affect our decisions as consumers about saving and
borrowing money

Higher interest rate =
Affects the economy:
-
business decisions
-
value of Canadian dollar
-
government budgets
Demand for loan able funds

Three sources
-
Consumers
-
Business
-
Government
Supply and Demand
Let’s Refresh
Lower interest rates = more funds borrowed
Higher interest rates = less funds borrowed
How Does Interest Affect Us?

Major purchases

Business Investment
Rate of return – amount of extra revenue an
investment will bring in

Government borrowing
Where does the money come from?

Individuals

Businesses

Chartered banks
Supply and demand?
Where does the money come from?
Individuals
-
Increase or decrease amount of $ in their savings
account
Reasons for saving? (recap)
Where does the money come from?
Business
-
Same as individuals (amount of $)
-
Save money to cover future purchases
-
May also save for future expansion
Where does the money come from?
Banks
How do banks create money?
-
If interest rates increase, chartered banks will want
to supply more $
Why?
Determine how each of the following will affect
interest rates and S & D
1.
The economy is recovering from a
recession; people tend to save less
and consume more.
2.
A recession causes consumers to
buy fewer houses, cars and other
major purchases.
3.
Businesses invest more in new
plants and machinery as the
economy continues to grow.
Continued
4.
Unemployment and falling incomes
cause a drop in savings
5.
Profit levels for business continue to
increase.