CIA4U0Analyzing Current Economic Issues

Chapter 12: Monetary PolicyTopic 4: Monetary Policy at Work in

the Economy

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Monetary Policy at WorkIntroduction

How Monetary Policy Works The Bank of Canada’s Recent Record

Monetary Policy at WorkHow Monetary Policy Works

Current situation: Recession AD crosses the AS line on the

flat/level part to left of the curve Need to move the AD line to the right

(increase demand) Bank of Canada lowers interest rates

and signals an easing of the money supply

Monetary Policy at WorkHow Monetary Policy Works

This will cause 4 things: Stage 1-Government moves deposits to

the Banks giving them more money and incentive to lower interest rates in order to attract more customers

Stage 2-Consumers borrow more to buy big ticket items; Business responds, invests more in expansion, plant & equipment

Monetary Policy at WorkHow Monetary Policy Works

Stage 3-Expanded business is now producing more, continued expansion of the money supply allows consumers to buy this output

Stage 4-Cycle continues-AD moves to the right until it gets to the FE point on the AS line (where the up-turn starts)

Monetary Policy at WorkHow Monetary Policy Works

Reverse occurs during periods of inflation

Bank of Canada tightens the money supply and raises interest rates

People spend less, companies produce less, clear surplus inventories

AD (and prices) drop until AD crosses at the FE point

Monetary Policy at WorkThe Bank of Canada’s Record So Far

A stable economy requires that it’s participants remain calm

In order to be calm, people need to be well informed

The BoC and the Government work hard to make sure that people know what is going on and how to respond

Last 15 years has been relative stable Low interest rates also caused the low

value of the Canadian dollar