ECON 105 Lecture Notes - Canadian Dollar, Demand Curve, Inflation Targeting

78 views6 pages

burgundyguinea-pig285

12 Dec 2012

School

Simon Fraser University

Department

Economics

Course

ECON 105

Professor

Tony Xiang

For unlimited access to Class Notes, a Class+ subscription is required.

tianjin and 38107 others unlocked

ECON 105 Full Course Notes

Verified Note

17 documents

Document Summary

29. 1 how the bank of canada implements monetary policy. For any given money demand curve, any central bank must choose between: targeting the money supply targeting the interest rate. The bank of canada and the overnight interest rate. The bank can more-or-less control the overnight interest rate. It does this by: setting a target for the overnight interest rate, establishing the bank rate 0. 25% above this target, establishing a borrowing rate 0. 25% below target. Keep actual overnight rate within 0. 5% band. As the bank changes its target for the overnight rate: Other interest rates change (eg. prime rate) The bank responds by supplying currency or buying currency from commercial banks. But these transactions are done passively by the bank of canada: An expansionary monetary policy occurs when the bank of canada reduces its target for the overnight interest rate. Eventually increases ms (or its growth rate)

Related Questions

1. Suppose the bank of Canada wanted to increase the supply of money. How could it use monetary policy to achieve the goal?

2.The money demand curve is shown in a graph with an interest rate on short term assets on the vertical axis. Why use short-term interest on the vertical axis and not the rate of return on other financial assets?

3 what will happen to the money supply is Jamie withdraws $400 from her chewing account and the reserve ratio is 5%

4. Using gold as an example, what is the difference between commodity money and commodity-backed money?

5. Suppose the annual inflation rate at 7% and 3% of the labor force is unemployed. If you were on the governing council of the bank of Canada, what action would you prescribe? How would this affect the economy, the inflation rate, and the unemployment rate?

ochreguinea-pig172

13. As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for a reason other than a change in $4,010 $570.3 $641.0 CHAPTER 15 Money, Interest Rates, and Exchange Rates 383 the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.) a. Describe the problems that might arise if a central bank sets monetary policy by holding the market interest rate constant. (First, consider the flexible-price case, and ask yourself if you can find a unique equilibrium price level when the central bank simply gives people all the money they wish to hold at the pegged interest rate. Then consider the sticky-price case.) b. Does the situation change if the central bank raises the interest rate when prices are high, according to a formula such as where a is a positive constant and a target price level? c. Suppose the central bankâs policy rule is where u is a random movement in the policy interest rate. In the overshooting model shown in Figure 15-12, describe how the economy would adjust to a permanent one-time unexpected fall in the random factor u, and say why. You can interpret the fall in u as an interest rate cut by the central bank, and therefore as an expansionary monetary action. Compare your story with the one depicted in Figure 15-13. Figure 15-12: http://gyazo.com/3d32377d42b5c9584e17b3c5e40aafaa

Figure 15-13: http://gyazo.com/1fa467e253e320f61da17532fa8d2b58

As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for a reason other than a change in the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.)

A. Describe the problems that might arise if a central bank sets monetary policy by holding the market interest rate constant. (First, consider the flexible-price case, and ask yourself if you can find a unique equilibrium price level when the central bank simply gives people all the money they wish to hold at the pegged interest rate. Then consider the sticky-price case.)

B. Does the situation change if the central bank raises the interest rate when prices are high, according to a formula such as R - R₀= a(P - P₀), where a is a positive constant and P₀a target price level?

C.Suppose the central bankâs policy rule is R - R₀= a(P - P₀) + u, where u is a random movement in the policy interest rate. In the overshooting model shown in Figure 15-12, describe how the economy would adjust to a permanent one-time unexpected fall in the random factor u, and say why. You can interpret the fall in u as an interest rate cut by the central bank, and therefore as an expansionary monetary action.

ECON 105 Lecture Notes - Canadian Dollar, Demand Curve, Inflation Targeting

ECON 105 Full Course Notes

Document Summary

Get access

Related Documents

ECON 105 Lecture Notes - Lecture 15: Foreign Exchange Market, Price Level, Financial Innovation

ECON 105 Lecture Notes - Lecture 10: Fractional-Reserve Banking, Open Market Operation, Reserve Requirement

ECON 105 Chapter Notes - Chapter 15: Money Supply, Aggregate Demand, Business Cycle

Related Questions