Monetary Policy in Practice Sup ? A Dangerous Game Money supply increases ($200 for passing GO) BUT No increase in output (fixed # of properties) Eventual Results: game merely inflates prices $ eaten up paying for inflated rents ; inevitable bankruptcy for many ultimately, most players are NOT better off WTF ??? As Well problems if too little money is created compared to output of goods too few $ chasing too many goods; WTF ??? Goldilocks in Government Deflation Inflation Just Right !!! Enter Monetary Policy Government tools to adjust the size of the money supply Effects the economy by influencing the expansion of money and credit Ensure that Canadas economy has just the right amount of money to purchase goods without causing either inflation or deflation regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit [aka, the Loonie] and to mitigate by its influence fluctuations in the general level of production, trade prices and employment. The Canadian Bank Act, 1934 Sup ? Functions of the Canadas Central Bank (aka Bank of Canada) Director of monetary policy Control growth of money supply by regulating interest rates, credit, and currency Banker to chartered banks Manages borrowing/ lending between Canadas chartered banks (BMO, TD, RBC, CIBC, Scotiabank, etc.) Prop up confidence in chartered bank by giving it a cash advance Banker to the federal government Holds governments revenues, buys /sells government bonds (ex. CSBs) & pays out interest on them, handles foreign exchange reserves (ex. US dollars, Euros, Yen, etc.) Issuer of Currency designs, mints& prints, varies amounts of notes needed, fights counterfeiting Bank of Canada: Organizational Chart Sup ? Steven Poloz, Governor of the Bank of Canada, Advantages of an Independent Central Bank manage nations money supply free of political interference (ie. in best interests of economy) Ex. Germany 1920s hyperinflation Protect value of money by separating power to spend money (govt) from power to create money (central bank) Worries about Accountability What if the Central Bank abused its powers? if government disapproves of the monetary policy being carried out by the Bank, it has the right and responsibility to direct the Bank as to the policy which the Bank is to carry out. Bank of Canada Annual Report, 1961 Sup ? Hon. Jim Flaherty, Canadas Minister of Finance, ? Although the government has the ultimate power, The governor [of the Bank of Canada] exercises such power on a daily basis that he or she is considered to be the most influential person in the Canadian economy. Economics Now, p. 268 How You Doin?