ECON 1010 Lecture Notes - Lecture 15: Economic Equilibrium, Inflation Targeting, Money Supply

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The demand for money: transactions demand, dt, demand for money as a medium of exchange, aries directly with gdo, asset demand, da, demand for money as a store of value, varies inversely with the interest rate. Canada can control the actual overnight interest rate. It will initiate an expansionary monetary policy (or easy money policy) which lowers interest rates to bolster borrowing and spending, which will increase aggregate demand and expand real output. If real gdp rises by 1% above potential gdp, the bank should raise the overnight rate by. Cause-effect chain: transmission mechanism: money supply impacts interest rates, equilibrium gdp is changed. Monetary policy: evaluation and issues: dominant component of canadian national stabilization policy, two key advantages over fiscal policy, speed and flexibility, isolation from political pressure. Problems and complications: monetary policy has certain limitations and faces real-world complications, lags, cyclical asymmetry and liquidity trap.

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