ECO100Y1 Lecture Notes - Bank Reserves, Reserve Requirement, Excess Reserves

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emeraldalligator738

30 Jul 2011

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Overnight interest rate (determined by back of canada) March 3, 2009: bank of canada lowers key interest rate from 1% to 0. 5% The outlook for the global economy has continued to deteriorate the nature of the u. s. recession . Transmission mechanism (mechanism through which the actions of bank of canada are transmitted into the world economic system). Money supply and money demand determine interest rates. Banking system: centeral bank (bank of canada) Uses control of money supply and interest rates to influence aggregate. Money (canada: currency + bank deposits: purposes. Unit of account: alternative to money: barter (very inefficient) Simplifying assumptions (in order to answer question: all banks have same desired/target reserve ratio, no cash drain (amount of cash held by public is fixed, bank capital is zero (for numerical examples) Reserves = vault cash + deposits at bank of canada. Reserves earn low or zero interest (cash, doesn"t earn any interest, therefore no profit)

Related Questions

An expansionary monetary policy may address the recessionary effects of a decline in aggregate demand by:

1. Increasing interest rates to stimulate aggregate demand
2. Increasing interest rates to stimulate aggregate supply
3. Increasing money supply to stimulate aggregate demand
4. Increasing money supply to stimulate aggregate supply

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply generates:

a. lower interest rates, which causes an increase in planned real investment spending and an increase in aggregate demand.

b. spending on consumer goods and services directly, which causes an increase in aggregate demand.

c. an increase in nominal GDP and a change in the price level, but no change in real GDP.

d. an increase in aggregate supply since the supply of money is part of aggregate supply.

azuregerbil469

The steps in the transmission of monetary policy are

A. Congress increases government expenditures on goods and services, leading to an increase in aggregate demand.
B. Congress increases the budget deficit, which increases the money supply, which increases aggregate supply.
C. Congress increases the money supply, which lowers the interest rate, and leads to an increase in aggregate demand.
D. The Federal Reserve lowers the federal funds rate, which lowers the real interest rate, and leads to an increase in aggregate demand.
E. The Federal Reserve increases government expenditures on goods and services, leading to an increase in aggregate demand.

erinmallard110

ECO100Y1 Lecture Notes - Bank Reserves, Reserve Requirement, Excess Reserves

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