Class Notes (834,408)
Canada (508,508)
Economics (1,511)
EC140 (417)

chapter 30.doc

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Rizwan Tahir

Chapter 30 Monetary PolicyTuesday March 05 20131259 PMObjective of monetary policy is to control quantity of money and interest rates to avoid inflationoPrevent excessive swings in real GDP growth and unemploymentBank of Canada conducts monetary policy an armslength organizationoNot a government department but is owned by themoMinister of Finance can still order Bank of Canada to change policyPolicy is implemented with less political influenceoMakes them better able to manage economyOfficial Monetary Policy of CanadaBank of Canada operates inflation rate targeting policyAlters interest rates and money supply to keep inflation in given rangePolicy isInflation is kept in band between 13 a yearInflation is targeted at 2 midpointRecently Bank of Canada has signalled it will depart from this policy if neededInflation target uses CPI as measure of inflationBank also pays close attention to core inflation operational guideBank believes core inflation is better measure of underlying inflation trend and better predicts future CPI inflationActual inflation rate sometimes falls out of accpetable range very fast recessions of expansionsOccurs due to timing and administrative lags Why Control Inflation SpecificallyTwo main benefitsFewer surprises and mistakes on part of savers and investorscalled transparencyBusinesses are better able to anticipate future rates and inflation make better investmentsAnchors expectations about future inflationPromotes stable consistent economic growthDownsides to inflation targetingUnemployment rate might riseReal GDP growth might be slowValue of dollar might rise on foreign exchange market makes exports suffer The Conduct of Monetary PolicyBank of Canada achieves its objectives mainly by altering money supplyHas the option to set any of the following by altering money supplyQuantity of money monetary base
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