CIA4U0 Analyzing Current Economic Issues Chapter 12: Monetary Policy Topic 4: Monetary Policy at Work in the Economy P

Monetary Policy at Work Introduction How Monetary Policy Works The Bank of Canadas Recent Record

Monetary Policy at Work How Monetary Policy Works Current situation: Recession AD crosses the AS line on the flat/level part to left of the curve Need to move the AD line to the right (increase demand) Bank of Canada lowers interest rates and signals an easing of the money supply

Monetary Policy at Work How Monetary Policy Works This will cause 4 things: Stage 1-Government moves deposits to the Banks giving them more money and incentive to lower interest rates in order to attract more customers Stage 2-Consumers borrow more to buy big ticket items; Business responds, invests more in expansion, plant & equipment

Monetary Policy at Work How Monetary Policy Works Stage 3-Expanded business is now producing more, continued expansion of the money supply allows consumers to buy this output Stage 4-Cycle continues-AD moves to the right until it gets to the FE point on the AS line (where the up-turn starts)

Monetary Policy at Work How Monetary Policy Works Reverse occurs during periods of inflation Bank of Canada tightens the money supply and raises interest rates People spend less, companies produce less, clear surplus inventories AD (and prices) drop until AD crosses at the FE point

Monetary Policy at Work The Bank of Canadas Record So Far A stable economy requires that its participants remain calm In order to be calm, people need to be well informed The BoC and the Government work hard to make sure that people know what is going on and how to respond Last 15 years has been relative stable Low interest rates also caused the low value of the Canadian dollar