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Monetary and Fiscal Policy.docx

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Western University
Political Science
Political Science 2211E
Adam Harmes

Nov 14 - Monetary and Financial Policy Today’s Topics 1) Domestic Macroeconomics 2) International Macroeconomics 3) The World Economy before the Great Depression Domestic Macroeconomics - Demand goes up, price goes up - Supply goes up, price goes down o So much of one product, need to lower price to sell (reduce-to clear) - Aggregate Demand: all demand added up together, “the total demand for goods and services in the economy” o Demand determined by:  Amount of money consumers and firms have to spend  Consumer and business confidence - Economic Growth: o Changes in the size of the national economy o Measured through Gross Domestic Product (GDP) o GDP: “the value of all good and services produced in a country in a given year” - Negative Growth: o When GDP shrinks, it’s referred to as “negative growth” o 2 quarters of negative growth= recession  Must shrink in two consecutive quarters of negative economic growth to be considered recession - Aggregate Demand and Growth o Demand goes up, growth goes up o Demand goes down, growth goes down - Unemployment o “The percentage of the labour force that is seeking employment but is not employed” o Does not include part-timers looking for full-time work - Demand and Unemployment o Demand goes up, unemployment goes down o Demand goes down, unemployment goes up - Inflation o “An increase in the general level of prices” o Measured through Consumer Price Index (CPI) o Inflation rate is percentage changes in the price level over time o Erodes savings and purchasing power o *********Disinflation vs deflation************  Disinflation means inflation rate is going down, if one year it goes up 3% and the next year it goes up 2% (decrease in percentage)  Deflation means the prices themselves are actually falling - Demand and Inflation o Demand goes up, inflation goes up o Demand goes down, inflation goes down - If demand goes up… o Growth goes up o Unemployment goes down o Inflation goes up - If demand goes down… o Growth goes down o Unemployment goes down o Inflation goes up - Unemployment and inflation- all other things being equal- move in the opposite ways. If unemployment goes up, inflation goes down. If inflation goes down, unemployment goes up - Monetary Policy o Government’s control over interest rates through the central bank o I.e. Bank of Canada, US Federal Reserve o Use interest rates to regulate demand and maintain balance between inflation and unemployment - Interest Rates and Demand o Lower interest rates make loans cheaper  People and firms pay less interest on existing loans  Cheaper to get new loans for purchases and expansions o People and firms have more money o Demand increases o Used to stimulate economy in slowdown o Demand goes down, unemployment goes up o Growth goes down, inflation goes down - In a recession, when interest rates go down o Demand goes up o Growth goes up o Unemployment goes down o Inflation goes up - The Business Cycle o 1) Recession: slow growth/ high unemployment o 2) Trough: Lower interest rates o 3) Recovery: Higher growth and inflation o 4) Peak: Higher interest rates to cool economy International Economics - International Finance: o Like trade, international finance can be either free or restricted (government control) o Free finance is known as “capital mobility”  Does not have rules and regulations that prevent investors to take money out of the country o Governments can prevent capital mobility through the use of “capital and exchange controls” - Exchange Rates o “The value of one currency priced in terms of another currency”  I.e. Canadian dollar priced in US dollars - Capital Flows and Exchange Rates o When money flows in, the currency goes up o When money flows out, the currency goes down o I.e. oil and the Canadian Dollar  Oil sands in Alberta expanding, investors start pouring money into Canada to finance oil project, and as a result the Canadian dollar goes up - Interest Rates and the Exchange Rate o Interest rate goes up, currency goes up  An investor will benefit, interest rate is the money the investor is getti
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