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Lecture 80

ECON 1020 Lecture 80: Lecture 80

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University of Manitoba
ECON 1020
Ryan A.Compton

Oc78 Increase target for overnight lending rate Bank of Canada sells securities Decrease money supply Increase other interest rates Slow down economy activity The Taylor Rule: Shows how much we want to change interest rates, in response to where the economy is on a certain number of metrics Where is real GDP relative to potential GDP? If real GDP rises by 1 above potential GDP, the central bank should raise the overnight rate by 0.5 percentage points If inflation rises by 1 above its target of 2, the bank should raise the overnight ending rate by 0.5 When real GDP is equal to potential GDP and inflation is equal to its target, the overnight rate should remain about 4, implying a real interest rate of 2 equilibrium base Monetary Policy, Real GDP, and the Price Level: CauseEffect Chain: The Transmission Mechanism o Money supply impacts interest rates Interest rates affect investment (also consumption but less important) Investment is a component of aggregate demand Equilibrium GDP is changed If interest rates increase, investments decrease, AE decreases, and equilibrium GDP decreases, and vise versa FIGURE 135: Monetary policy and equilibrium GDP Increase money supply (BOC), leads to lower interest rates, leads to higher investment, which increases aggregate demand (higher output and price) The money supply effects the economy as a whole TABLE 132: Problem unemployment and recession:
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