Download the powerpoint presentation regarding Monetary Policy.

Monetary Policy
Expansionary
Contractionary
Tools
Benefits/Limitations
Monetary Policy
 Monetary Policy involves
• The Bank of Canada changing interest rates
• The Bank of Canada altering the money supply
• Or a combination of the above to stabilize the
economy
Easy money policy
 Monetary policy can be “Expansionary” or
“Contractionary”
Tight money policy
Expansionary Monetary Policy
 Expansionary monetary policy
• is a policy of increasing the money supply and
lowering interest rates which shifts AD
rightward by a magnified amount due to an
initial increase in investment and the
consumption of durable goods
• is used to eradicate a recessionary gap
Expansionary Monetary Policy
AS
Price
Level
Capacity Output
Real Output before
Easy Money Policy
P2
P1
AD1
Q1
Real GDP
Q2
AD2
Real Output after Easy
Money Polciy
Recessionary Gap
closes
Contractionary Monetary Policy
 Contractionary monetary policy:
• is a policy of decreasing the money supply and
raising interest rates which shif ts AD leftward
by a magnified amount due to an initial
decrease in investment and the consumption
of durable goods
• is used to eradicate an inflationary gap
Contractionary Monetary Policy
AS
Capacity Output
Price
Level
Inflationary Gap closes
P1
Real Output before
Tight Money Policy
P2
AD1
AD2
Q2
Real GDP
Q1
Real Output after
Tight Money Policy
Tools of Monetary Policy
 Open Market Operations
 Government Deposits
 The Bank Rate
 Changes in Reserve Requirements
Open Market Operations
 Open market operations are a tool the Bank
of Canada uses to conduct monetary policy
• Buying/selling Bonds and T-Bills
– Bank of Canada buys bonds from Canadian
Corporations and the result is an increase in the
money supply
– Bank of Canada sells bonds to Canadian
Corporations and the result is a decrease in the
money supply because the $ is out of circulation.
Government Deposits
 Moving government deposits is another
tool the Bank of Canada uses to conduct
monetary policy
• The Bank of Canada can increase the money
supply by transferring federal government
deposits to chartered banks
• The Bank of Canada can decrease the money
supply by moving the money from the
chartered banks to its own.
Changes in the Bank Rate
 Changing the bank rate is a tool the Bank of
Canada uses to signify its monetary policy
intentions
• An increase in the bank rate tells the chartered
banks that the B of C wants a decrease in loans
and an increase in interest rates to create a
decrease in the money supply
• A decrease in the bank rate tells the chartered
banks the opposite.
Changes in Reserve Requirements
 As the reserve ratio increases, the Money
Supply decreases
 As the reserve ratio decreases, the money
supply increases
The Benefits and Drawbacks of
Monetary Policy
 Monetary policy has two main benefits
• it is separated from day- to- day politics
• decisions regarding monetary policy can be
made quickly
 Monetary policy has two main drawbacks
• it is less effective as an expansionary tool than
as a contractionary tool
• it cannot be focused on particular regions