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ECO102H1 (155)

Money, Banking, Monetary Policy.

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James Pesando

Topic 19 J Money, Banking and Monetary Policy th th Feb 28 J March 14 Outline: 1. What is Money? 2. How Banks Create Money -- Desired Reserve Ratio -- Multiple Deposit Creation 3. Demand for Money 4. Bond Prices Falls Interest Rate Rises 5. Interest Rate Determination ( Short - Run ) 6. Bank of Canada -- Controls the money supply -- Multiplier effect of open market operations 7. Monetary Policy in AD - AS Model z What is money (Canada: Currency + Bank Deposits) -- Purpose: Medium of exchange Store of value Unit of account -- Alternative to money: barter (very inefficient) -- Banking system 1. Central bank (Bank of Canada) -- Uses control of money supply and interest rates to influence Aggregate Demand 2. Commercial Banks -- Create money as by-product of profit-seeking activities; z Motivation e.g. Overnight Interest Rate (Determined b Bank of Canada) December 2007 (prior to recession) 4.5% March 2009 (during the recession) 0.5% (almost zero) March 2011 (During recession) 1.0% March 3 2009; Bank of Canada lowers key interest rate from 1% to 0.5% 1. Why? ^The outlook for the global economy has continued to deteriorate;The nature of the US particularly challenging for Canada._ 2. Purpose To increase Aggregate Demand, to reduce ^spillovers_ from recession in US.
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