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Transcript
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 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 _____________________. The same effect happens when _____________________________________________increase. Calculation: Total change in output = (shift in AD curve) 3. Contractionary Monetary Policy ( ) 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 ___________________ 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) (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 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.