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Chapter 14
Monetary Policy
KEY WORD
Bank rate: the interest rate CPA members are charged on advances from the Bank of Canada
CanadaSavingBonds: federal government bonds that have a set value throughout their term
Contractionary Monetary Policy: a policy of decreasing the money supply and increasing interest
rates to dampen the economy
Cost-pushinflation: inflation that occurs as increased aggregate demand pulls up prices
Demand-pullinflation: inflation that occurs as increased aggregate demand pulls up prices
ExpansionaryMonetaryPolicy: a policy of increasing the money supply and reducing interest rates to
stimulate the economy
Long-run aggregate supply curve: the vertical AS curve at the potential output level
Open market operations: the buying and selling of bonds by the Bank of Canada.
Overnightrate: the interest rate on overnight loans between chartered banks and other financial
institutions.
Phillipscurve: a curve expressing the assumed fixed and predictable inverse relationship between
unemployment and inflation.
Primerate: the lowest possible interest rate charged by deposit-takers on loans to their best corporate
customers.
Stagflation: a combination of consistently low output (and so constant or expanding unemployment)
and rising inflation.
Treasurybills: short-term federal government bonds that provide no interest but are sold at a discount.
14.1 The Bank of Canada
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1.
2.
3.
4.
Jenny Wong
The moving force behind Canada’s _________________________ policy is the Bank of Canada.
The “Bank” has been given a mandate to perform ____________basic functions:
______________the money supply;
2. Acting as the__________________________________;
Acting as”___________________”;
______________________the stable operation of financial markets.
Managing the money supply

Bank of Canada is to conduct monetary policy by __________________________________the
amount of money circulating in the_________________________________________.
1. Reduce inflation keep the purchasing power of the dollar;
2. ____________________real output to its potential level;
3. ________________the external value of the Canadian dollar on______________________markets.
Acting as the Bankers’ Bank
 Bank of Canada holds the deposits of financial institutions that are members of _______________
 CPA is the larger trust companies and representatives of _________________and_____________.
It acts as a clearing house for cheques of both chartered banks and near banks.
 The________ is the interest rate CPA members are charged on advances from the Bank of Canada
Acting as the federal government’s fiscal agent
 The Bank of Canada engages in 3 main tasks:
1. Hold some of_________________________________________ and________________________;
2. Act as the government’s_______________ by___________________federal government cheques;
3. Handles the financing of _________________________debt by issuing ______________________.
 Canada Saving Bounds is ________________________________________________
 The different from others in that they are not ____________________________and
_____________________________after they have first been issued.
 Holders of these who want their funds back before the bonds have matured must
“_______________________” the bonds with the Bank of Canada at a ____________________.
 Treasury bills are a ___________________________________federal government bonds that
provide _____________________________, but are sold at _____________________________.
 The _______________________________for federal treasury bills is decided at an auction
conducted every second Tuesday by ________________________________________________.
Ensuring the stable operation of financial markets

The bank of Canada supervises the operation of financial markets to ensuretheir _____________

It helps protect the safety of _________________________ and the soundness of
the______________________________.
14.2Monetary Policy
Carrie Cheng
There are 2 kinds of monetary policy:
1. Expansionary Monetary Policy (
)

When real output falls __________potential level, a ______________________is created.
This policy is used to _____________________a recessionary gap.

The policy stimulate_____________ and _______________________.

Apply the policy by_______________________ the money supply :
Money supply   Supply curve shift ___________  Money Quantity   Interest rate 

________________________________respond by increasing their investment spending and
___________________________________purchase more durable goods, raising consumption

Aggregate demand shifts _____________________.
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The same effect happens when _____________________________________________increase.
 Calculation:
Total change in output =
(shift in AD curve)
3. Contractionary Monetary Policy (
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)
During an economic boom, contractionary monetary policy can ____________________________and
_____________________. Which means eradicate an __________________________________.
____________________________money supply in order to raise the interest rate:

Money supply   Supply curve shift___________  Money Quantity   Interest rate 
This ___________________________________investment spending by businesses as well as
consumption spending by household, and it influences aggregate demand.

Aggregate demand shifts _____________________.
14.3Tools of Monetary Policy
 Two different tools to conduct monetary policy
1. Open market operations
2. The target overnight rate
Open Market Operations
 Recall that the Bank of Canada sells and buys back federal government bonds. Its role in the bond
market is a major tool with which the Bank of Canada conducts monetary policy.
 Bank of Canada use deposit-takers’ cash reserves as a lever to influence both the money supply and
interest rates.
Bond Sales
 The sale of bonds reduces the cash reserves of deposit-takers, which cuts back on leading and finally
_________________________________________the supply of money. By selling bonds, the Bank of
Canada engages in_________________________________________________________________
 Maximum amount decrease in the money supply= ________________________________________
- Assuming that the bank of Canada sales$100 bond to a member of the public, the reserve ratio is 0.1
Maximum amount decrease in the money supply = _______________________________________
Bond Purchases
Carrie Lian
 Bank of Canada buying ____________bonds from members of the____________ in the open market.
 Buying back bonds allows the Bank of Canada to______________________________________.
 Cash reserves ________, resulting in increased lending, which causes the money_________to expand.
 Maximum amount increase in the money supply= ________________________________________
- Assuming that the bank of Canada buys $100 bond to a member of the public, the reserve ratio is 0.1
Maximum amount increase in the money supply = _______________________________________
The Target Overnight Rate
 The ______________________________ is the interest rate on overnight loans between chartered
banks and other financial institutions.
 The bank makes sure that the overnight rate stays within a publicized range of _________basis points.
 A rise in the bank rate signals a ___________________________policy in the near future while a fall
in the bank rate signals an________________________________________ policy.
 If the change in the bank rate is substantial then deposit-takers also adjust their __________________
which is the lowest possible rate charged on loans to deposit-takers’ best corporate customers.
Benefits of Monetary Policy
 2 main benefits:
1. ________________________________________________: It is isolated from politics.
2. ________________________: Decisions regarding monetary policy can be made quickly.
Drawbacks of Monetary Policy
 2 main drawbacks:
1. Weakness as an expansionary tool: It is _____________________effective as an expansionary
tool than as a concretionary tool.
 During recession or depression, the bank can _______________________deposit-takers’ casher
serves through open market purchases of bonds.
 No guarantee that this will translate into more bank loans and an expansion of the money supply.
2. Broad impact: It cannot be focused on particular_____________________.
14.4 Inflation and Unemployment
Annabella Chen
 __________ inflation occurs as _________ shifts in the____________________curve pull upprices
 ___________inflation occurs as ________shifts in the ____________________curve push up prices.
The Phillips Curve
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___________________ expresses the assumed fixed and predictable _______________relationship
between unemployment and inflation. When the economy moves from point b to point a --- which
may happen as result of ________________________________policies --- inflation increase, and
unemployment decreases. In contrast, ______________________________policies cause the
economy to move from point b to point c.
 From 1960 to 1972 the Canadian Phillips curve was _____________________________________;
 From 1973 to 1982 the Canadian Phillips curve ______________________ resulting in stagflation;

From 1983 to 2002 the Canadian Phillips curve was ______________________________while
the inflation rates were low and the employment rates remained high.
The Economy’s Self-Stabilizing Tendency (Figure 14.9)
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(Jessica Chen)
Point ___ on the graph is the AS curve showing the
potential output, which is the economy stationary
in the long run.
Economic boom (represented by point ____) is when
unemployment is below its natural rate.
High employment rate (represented by point ____)
is when the economy’s potential is below its potential output.
The Long-Run Aggregate Supply Curve
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In the__________, the aggregate supply curve is __________, whereas in the ____________, the
aggregate supply curve is __________________.
The reason why the long run aggregate curve is vertical is because the ______________ doesn't
affect the long run components of real GDP.
In the long run, an economy's production of goods and services depends on the
______________________________________________________________________________
___________________________________ to turn these factors of production into goods and
services.