Class Notes (806,766)
Canada (492,430)

2013-11-04 Monetary and Financial Policy.docx

10 Pages
Unlock Document

Western University
Political Science
Political Science 2211E
Adam Harmes

Monetary and Financial Policy November 4, 2013 Today’s Topics 1. Domestic Macroeconomics 2. International Macroeconomics 3. The World Economy Before the Great Depression Domestic Macroeconomics Review: Demand and Prices -if demand for specific product goes up, the price goes up -Demand up = Price up Review: Supply and Prices -Supply up = Price down -scarcity is less; supply is greater than the demand of it Aggregate Demand -Aggregate Demand: -“the total demand for goods and services in the economy” -Determined by: -the amount of money consumers and firms have to spend -if people are laid off, they don’t have money to spend -aggregate demand would go down; people would not be able to afford it -consumer and business confidence -you’re not laid off but your coworkers are laid off -you hold off spending Growth -Changes in the size of the national economy -Measured through Gross Domestic Product or GDP -overall size of the economy -percentage it grew by of economic pie -GDP: “the value of all goods and services produced in a country in a given year” Negative Growth -When GDP shrinks, it’s referred to as “negative growth” -economy shrunk by 2%, 3%, etc. -2 quarters of negative growth in a row = recession 1 Aggregate Demand and Growth -Demand up = Growth up -more people are buying goods and serves = companies sell more = companies get more profit = economy grows -Demand down = Growth down Unemployment -“the percentage of the labour force that is seeking employment but is not employed” -does not include part-timers looking for full-time work -economy has increasing number of part-time jobs -unemployment rate during recession can be misleading -people unemployed for so long that they give up = they don’t count as unemployed -unemployment rate goes down a bit but because people stopped looking (gave up) Demand and Unemployment -Demand up = Unemployment down -more demand for goods and services in economy = people are buying goods and services = companies selling more things = hire more people to make/sell those things = unemployment rate goes down -Demand down = Unemployment up -less demand for goods and services = people buying less stuff = companies laying off people = unemployment rate goes up Inflation -“an increase in the general level of prices” -Measured through Consumer Price Index (CPI) -CPI: it’s like an opinion poll -government cannot track every single item and interview every single Canadian -take representative sample of population and use that to provide proxy of broader Canadian opinion -basket: certain goods and services they track meant to represent all goods and services -Inflation rate is percentage changes in the price level over time -Erodes savings and purchasing power -Disinflation vs. deflation -disinflation: when inflation rate goes down, not prices go down -inflation rate has gone down, but prices going up (but less fast) -disinflation: inflation rate slows down the price increase -deflation: prices actually fall -can only happen in depressions -prices never go down; if it does, there’s something wrong with your economy -inflation: price rising 2 -people having a lot of money in bank -if you have money sit in bank, over time, inflation will eat away the value you save -e.g. you save $7000/$8000 for retirement; once you are old, you might need to double that in order to purchase the same good Demand and Inflation -Demand up = Inflation up -if more people buy your product, you can raise prices -Demand down = Inflation down -people buying less goods and services = businesses not getting more money = decrease price If demand goes up... -Growth – up -more people buying goods = businesses make more of product = economy grows -Unemployment – down -companies selling more = businesses hire more workers -Inflation – up -sell more = at a certain rate, they raise prices = as they raise prices, inflation rate would go up If demand goes down... -Growth – down -less people buying stuff = company would have less money = layoff workers -Unemployment – up -company not selling as much = companies lay off employees -Inflation – down -........... -unemployment and inflation = inverse relationships -if unemployment goes up = inflation goes down -vice-versa -move in opposing directions Monetary Policy -Government’s control over interest rates through the central bank -i.e. Bank of Canada, US Federal Reserve -Central Bank = Bank of Canada -The Fed = U.S. Federal Reserve -acts like Supreme Court; appoint Governor and once confirmed, Governor is independent 3 -PM cannot call Governor and manipulate interest rates -Use interest rates to regulate demand and maintain balance between inflation and unemployment -too much unemployment or too much inflation = bad -there is no one policy that keeps both unemployment and inflation down -interest rates: used to affect demand in economy -Central Bank must maintain balance -can’t let deflation so low = unemployment rate would skyrocket -can’t let unemployment be too low = inflation would go up Interest Rates and Demand -Lower interest rates make loans cheaper -People and firms pay less interest on existing loans -Cheaper to get new loans for purchases and expansions -you have less incentive to save money and lend it out if interest rates are low -interest rates go up = you pay more money for your mortgage = you have less money to spend -interest rates go down = you pay less money for your mortgage = you have more money to spend -people have more money to spend = increase aggregate demand through ecnonomy -People and firms have more money -Demand increases -Used to stimulate economy in slowdown Slow-Growth or Recession -Demand goes down = Growth down -consumer confidence goes down (no one is spending money for some reason) = companies lay off people - Unemployment up Inflation down When a recession occurs... -...the Central Bank will lower interest rates -Lower interest rates increase demand Interest Rates go down... -Demand goes up = Growth goes up -lower interest rates = people borrow more = people buy more = economic growth goes up -Unemployment down = Inflation up -hire more workers = unemployment goes down = after a while (after recession) 4 If inflation goes up.... -...the central bank will raise interest rates -cool economy down -Higher interest rates lower demand -monthly interest payments go up = paying more = you have less money = more expensive to get loans Interest Rates Go up... -Demand goes down = Economic Growth goes down -Unemployment goes up = Inflation goes down The Business Cycle -back and forth between inflation and unemployment -teeter-totter -1. Recession: slow growth/high unemployment -2. Trough: Lower interest rates -stimulate economy, people have more money -3. Recovery: Higher growth and inflation -people spend more = businesses earn more -4. Peak: Higher interest rates to cool economy -at the peak, you would have inflation -monetary policy is not perfect -has lag time -by the time you raise/lower interest rates, it takes 2-3 months to implement it -Central Banks usually overshoot – they don’t know how much to put -you don’t want too much cash in the economy = it’ll lead to inflation
More Less

Related notes for Political Science 2211E

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.