BSM 100 Lecture Notes - Lecture 3: Money Supply, Crisis Management, Frictional Unemployment

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BSM110 (Chapter 4 Cont)
Impact of Macro-Economic Crisis
-U.S. ’08 Economic Crisis —> Impact on Canada
Our exports go down because the US doesn’t have the money to buy
However, our imports went up because it was cheaper; they were willing to sell
things for less
Lead to deficit, impact on the dollar, job loss, tourism declined (less tourists coming
to Canada, less US students coming here and more Canadian students able to go
to US)
Negative news that was highly prominent during the crisis made people scared of
taking risks and starting up new things
Monetary and Fiscal Policy
-Bank of Canada
Monetary Policy: M1 money supply (all currency, paper bills and coins, checking
accounts, ready money), and M2 money supply (plus most savings accounts, mon-
ey market accounts, and certificates of deposit, not ready money)
Manages Canada’s monetary policy
How does BOC control money supply and inflation?
-Inflation: too much money chasing too few goods (too much money but
can’t buy everything that you want).
-When it’s high (large money supply) you want to reduce the money supply,
take money away from the people; does this with security trading (selling Bonds
and Treasury Bonds)…But if you continue to sell Bonds over time too much mon-
ey is circulating
-When it’s low (sluggish economy) you want to boost economic activity, put
in more money by buying Bonds (gov. buying the Bonds)
-When interest rates are down people are more willing to start up new
things and take risks
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