monetary policy – policy designed to change the money supply, credit availability, and interest...
TRANSCRIPT
Monetary Policy
– policy designed to change the money supply, credit availability, and interest rates
– responsibility of the Bank of Canada
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Monetary Policy
Expansionary Monetary Policy– a policy that aims to increase the amount of money
in the economy and make credit cheaper and more easily available
Contractionary Monetary Policy – a policy in which the amount of money in the
economy is decreased and credit becomes harder to obtain and more expensive
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Monetary Tools
1. Open market operations - buying and selling securities by the Bank of Canada in the open market
2. Switching government deposits - transfer deposits from a commercial bank to the Bank of Canada to decrease money supply - transfer deposits to a commercial bank to increase money supply
3. Targeting the overnight rate 4. Moral suasion
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Keynesian Transmission Process
Keynesian monetary policy goals
1. Steady growth in real GDP
2. An exchange rate that ensures a viable balance of trade
3. Stable prices
4. Full employment
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Keynesian Transmission Process
Transmission process
- the Keynesian view of how changes in money affect (transmit to) the real variables in the economy - the interest rate provides the link between the money market and the goods market
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The Effects of Contractionary Monetary Policy
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Potential GDP
ASAS
AD1
AD2
YFE YE
P
• contractionary monetary policy reduces AD1 to AD2• the inflationary gap (YE – YFE) is thereby closed
The Effects of Expansionary Monetary Policy
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• expansionary monetary policy increases AD1 to AD2• the recessionary gap (YFE - YE) is thereby closed
Potential GDP
AS
AD1AD2
YFEYE
P
Criticisms of Keynesian Monetary Policy
– The twin goals of full employment and stable prices are incompatible
–May not be possible to achieve them together
– The best a central bank can do is achieve a delicate balance between the two, without ever attaining either goal
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