 The Bank of Canada is in charge of all money supply. ◦ Regulates the amount of money in the system.

 3 Main tasks: ◦ Acts as the government’s banker by clearing federal government cheques ◦ Bank holds some of the government’s bank deposits and decides where the other deposits should be held ◦ Handles the financing of the federal government’s debt by issuing bonds.

 2 Categories ◦ Canada Savings Bonds ◦ Treasury Bills

 Canada Savings Bonds: Federal government bonds that have a set value throughout their term.

 Treasury Bills: Short-term federal government bonds that provide no interest, but are sold at a discount.

 Bank of Canada is also in charge of the stability of chartered banks. ◦ This is called Monetary Policy

 Two different kinds: ◦ Expansionary Monetary Policy ◦ Contractionary Monetary Policy

 A policy of increasing money supply and reducing interest rates to stimulate the economy. ◦ If real out put falls a recessionary gap is created and expansionary monetary policy is used.

 When in action: When nominal interest falls businesses respond by increasing their investment spending and households purchase more durable goods, raising consumption. ◦ If consumption totalled $9 billion and value of economy’s spending multiplier is 1.67 then total change in AD is $15 billion.

 A policy of decreasing the money supply and increasing interest rates to dampen economy. ◦ Happens during an economy boom. Done to disable investments and causes a reduction in spending. ◦ Same example as before but a decrease in $9 billion will result in a decrease of $15 billion.

 3 different tools to conduct policies: ◦ Open Market Operations ◦ Government Deposits ◦ The bank rate.

 Is the buying and selling of bonds by the Bank of Canada. ◦ Selling bonds reduces cash reserves and decreases money supply. ◦ Buying of bonds increases money supply.

 Moving federal government deposits from Bank of Canada to chartered banks, the Bank of Canada conducts expansionarry policy. And Vice Versa.

 Interest paid by members of Chartered Banks when they receive Bank of Canada advances.  Overnight Rate: the interest rate on overnight loans between chartered banks and other financial institutions.

 Bank buys bonds or moves government deposits to Chartered banks then the Bank increases in value which reduces overnight borrowing. ◦ Vice-Versa.

 2 main beneftis: ◦ Separation from politics ◦ Speed

 Unlike fiscal policy, because it is controlled by an appointed member and is secretive then policy is focused on economic goals rather than political.

 Monetary policy decisions can be made very quickly compared to fiscal policy.

 Two major drawbacks: ◦ Relative weakness as expansionary tool ◦ Broad impact

 Using expansionary policy cannot guarantee it will translate into more bank loans and an expansion of money supply.

 Monetary affects every region instead of only being focused on one.

 Both monetary and fiscal policy used to control these issues.  Demand-Pull Inflation: inflation that occurs as increased aggregate demand pulls up prices.

 Philips Curve: a curve expressing the assumed fixed and predictable inverse relationship between unemployment and inflation.  According to Keynesian perspective if an economy with an inflation rate of 2 percent and an unemployment rate of 8 percent experiences demand-pull inflation, the inflation rate will rise as the same time unemployment decreases.

 An increase in aggregate demand creates shortages in labour market, which puts upward pressures on wages, thereby boosting inflation. Decrease increases unemployment.  Used by governments to determine how policies will effect economy.