1. Expansionary Contractionary Tools Benefits/Limitations
Monetary Policy
Expansionary
Contractionary
Tools
Benefits/Limitations

2. Monetary Policy Monetary Policy involves
The Bank of Canada changing interest rates
The Bank of Canada altering the money supply
Or a combination of the above to stabilize the economy
Easy money policy
Monetary policy can be “Expansionary” or “Contractionary”
Tight money policy

3. Expansionary Monetary Policy
is a policy of increasing the money supply and lowering interest rates which shifts AD rightward by a magnified amount due to an initial increase in investment and the consumption of durable goods
is used to eradicate a recessionary gap

4. Expansionary Monetary Policy
Real Output before Easy Money Policy P1
Price Level
Real GDP AS
AD1 Q1
Capacity Output
AD2 Q2 P2
Recessionary Gap closes
Real Output after Easy Money Polciy

5. Contractionary Monetary Policy
is a policy of decreasing the money supply and raising interest rates which shif ts AD leftward by a magnified amount due to an initial decrease in investment and the consumption of durable goods
is used to eradicate an inflationary gap

6. Contractionary Monetary Policy
Price Level
Real GDP AS
AD1 Q1
Capacity Output
AD2 Q2 P2
Inflationary Gap closes
Real Output before Tight Money Policy
Real Output after Tight Money Policy

7. Tools of Monetary Policy
Open Market Operations
Government Deposits
The Bank Rate
Changes in Reserve Requirements

8. Open Market Operations
Open market operations are a tool the Bank of Canada uses to conduct monetary policy
Buying/selling Bonds and T-Bills
Bank of Canada buys bonds from Canadian Corporations and the result is an increase in the money supply
Bank of Canada sells bonds to Canadian Corporations and the result is a decrease in the money supply because the $ is out of circulation.

9. Government Deposits
Moving government deposits is another tool the Bank of Canada uses to conduct monetary policy
The Bank of Canada can increase the money supply by transferring federal government deposits to chartered banks
The Bank of Canada can decrease the money supply by moving the money from the chartered banks to its own.

10. Changes in the Bank Rate
Changing the bank rate is a tool the Bank of Canada uses to signify its monetary policy intentions
An increase in the bank rate tells the chartered banks that the B of C wants a decrease in loans and an increase in interest rates to create a decrease in the money supply
A decrease in the bank rate tells the chartered banks the opposite.

11. Changes in Reserve Requirements
As the reserve ratio increases, the Money Supply decreases
As the reserve ratio decreases, the money supply increases

12. The Benefits and Drawbacks of Monetary Policy
Monetary policy has two main benefits
it is separated from day- to- day politics
decisions regarding monetary policy can be made quickly
Monetary policy has two main drawbacks
it is less effective as an expansionary tool than as a contractionary tool
it cannot be focused on particular regions