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Lecture Understanding economics (2nd edition): Chapter 14 - Mark Lovewell, Khoa Nguyen

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Chapter 14 - Monetary policy. In this chapter, you will: Learn about the Bank of Canada and its functions, analyze the tools the Bank of Canada uses to conduct monetary policy, examine the tradeoff between inflation and unemployment. | Understanding Economics Chapter 14 Monetary Policy Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. 2nd edition by Mark Lovewell and Khoa Nguyen Chapter Objectives In this chapter, you will: learn about the Bank of Canada and its functions analyze the tools the Bank of Canada uses to conduct monetary policy examine the tradeoff between inflation and unemployment Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. The Bank of Canada (a) The Bank of Canada performs four basic functions it manages the money supply it acts as the bankers’ bank holding deposits of members of the Canadian Payments Association making advances to CPA members at the bank rate * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. The Bank of Canada (b) it acts as the federal government’s fiscal agent holding some of the government’s bank deposits clearing the government’s cheques . | Understanding Economics Chapter 14 Monetary Policy Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. 2nd edition by Mark Lovewell and Khoa Nguyen Chapter Objectives In this chapter, you will: learn about the Bank of Canada and its functions analyze the tools the Bank of Canada uses to conduct monetary policy examine the tradeoff between inflation and unemployment Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. The Bank of Canada (a) The Bank of Canada performs four basic functions it manages the money supply it acts as the bankers’ bank holding deposits of members of the Canadian Payments Association making advances to CPA members at the bank rate * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. The Bank of Canada (b) it acts as the federal government’s fiscal agent holding some of the government’s bank deposits clearing the government’s cheques handling the financing of the government’s debt by issuing bonds (including Canada Savings Bonds and treasury bills) it helps supervise the operations of financial markets to ensure their stability * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Expansionary Monetary Policy (a) 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 * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Expansionary Monetary Policy (b) Figure 14.1, page 350 The Money Market Quantity of Money ($ billions) Nominal Interest Rate (%) 0 30 40 50 60 1 2 3 4 5 The Economy Real GDP (1992 $ billions) Price Level (GDP deflator, 1992 = 100) 0 790 795 900 805 140 130 120 110 100 a b c d e Sm0 Sm1 Dm AD0 AD1 AS Potential Output Initial Recessionary Gap * Copyright © 2002