Political Science 2211E Lecture Notes - Lecture 5: Impossible Trinity, Money Supply, Financial System

• School: Western University
• Department: Political Science
• Course: Political Science 2211E
• Professor: Lisa Lyons

Document Summary

Main objectives: stabilize growth and pace of economic activity, keynes: markets reach equilibrium below full employment, monetary policy: interest rates, inflation, and exchange rates. Interest rates: the cost of money, central banks influence ir through their key policy rate, low ir increases aggregate demand, high ir decreases aggregate demand, central banks do not directly control rates charged by commercial lenders. Inflation: general rate of price increase, cpi, bank of canada"s inflation control target. If inflation is high the bank raises policy rate. If inflation is low the bank lowers policy rate o o: currently at 1% o the future. The impossible trinity: governments can only achieve two of the following three, capital mobility, fixed exchange rates currencies and commodities. Biggest hurdle, keeping value of currency stable in relation to other: monetary policy autonomy, canada: capital mobility and policy autonomy, falling dollar less painful than slowing economic growth.