Chapter 12 (The Bank of Canada)

What is the bank of Canada’s most important role?

Controlling the supply of money and the interest rates

4 Main areas of responsibility

Currency, Fund management, Financial system, Monetary policy

Monetary policy makes decisions on?

Money supply and interest rates

Current inflation targets

1%-3%

The bank of Canada can use two method to enact monetary policy

Alter its overnight interest rates and or engage in OMO

If the bank lowers the rate

Borrowing becomes cheaper, money supply increases

If banks raise the rate

Borrowing becomes more expensive, money supply decrease’s, inflation slows down

Buying Bonds (OMO)

Banks have more reserves, increases money supply, interest rates tend to fall

Selling bonds (OMO)

Removes money from the money supply, Interest rates raise, banks have fewer reserves

Banker deposit rate

Is the interest rate that the Bank of Canada pays banks on surplus funds deposited

If the Bank of Canada thinks inflation is high they should…

Sell government bonds (OMO), raise the bank rate

If the Bank of Canada thinks inflation is low they should…

Buy government bonds (OMO), Lower the bank rate

If the bank of Canada is concerned about underutilization, it can increase the money supply by…

Buying government bonds, Lowering the bank rate

Velocity of money is…

The average number of times a dollar is used in purchasing something over a year

Bank note =

Overnight rate + 0.25

Deposit note =

Overnight rate - 0.25

Overnight note =

Bank rate - 0.25

If inflation is persistently above 2% and it is increasing…

Raise the interest rate, Raise the target for the overnight lending rate

If inflation is persistently below 2% and it is decreasing

Lower the interest rate.

When there is a inflationary gap, how can monetary policy affect real output and price level

A contractionary monetary policy can result in decreased real output and decreased price level

When there is a recessionary gap, how can monetary policy affect real output and price level…

A expansionary monetary policy can result in increased real output and increased price level