Economics 1022A/B Chapter Notes - Chapter 30: Open Market Operation, Overnight Rate, Bank Reserves

13 views3 pages
Published on 22 Apr 2013
School
Western University
Department
Economics
Course
Economics 1022A/B
Page:
of 3
Chapter 30
The operating band is the target overnight rate plus or minus .25 percentage points
so the operating band is .5 percentage points wide
1. The bank rate is the interest rate that the Bank charges big banks on loans, and is
set at the target overnight rate plus .25 percentage points
2. Settlement balances rate is the interest rate the Bank pays on reserves and is set
at the target overnight rate minus .25 percentage points
An open market operation is the purchase or sale of government securities
by the BOC from or to a chartered bank or the public (Bank buys securities, it
pats for them with newly created reserves and when sells they are paid for
with the reserves help by banks)
o Purchase increases bank reserves, sale decreases bank reserves
Quick Overview:
When the BOC lowers the overnight rate:
o 1. Other short-term interest rates and the exchange rate
fall
o 2. The quantity of money and the supply of loanable
funds increase
o 3. Long term real interest falls
o 4. Consumption expenditure, investment and net
exports increase
o 5. Aggregate demand increases
o 6. Real GDP growth and the inflation rate increase
o When the BOC raises the overnight rate, the ripple
effects go in the opposite direction
o All the ‘rates’ fall or rise together (except for inflation)
Fighting recession
If inflation is low and the output gap is negative, the Bank lowers the overnight rate
target
The increase in the supply of money increases the supply of loanable funds in the
short term
BOC fights high inflation
If inflation too high and output gap is positive, the Bank raises the overnight rate
target
The decrease in the supply of money decreases the supply of loanable funds in the
short term