1. Monetary Policy – policy designed to change the money supply, credit availability, and interest rates – responsibility of the Bank of Canada LO2 9- 1© 2012 McGraw-Hill Ryerson Limited

2. Monetary Policy Expansionary Monetary Policy – a policy that aims to increase the amount of money in the economy and make credit cheaper and more easily available Contractionary Monetary Policy – a policy in which the amount of money in the economy is decreased and credit becomes harder to obtain and more expensive LO2 9- 2© 2012 McGraw-Hill Ryerson Limited

3. Monetary Tools 1.Open market operations - buying and selling securities by the Bank of Canada in the open market 2.Switching government deposits - transfer deposits from a commercial bank to the Bank of Canada to decrease money supply - transfer deposits to a commercial bank to increase money supply 3.Targeting the overnight rate 4.Moral suasion LO2 9- 3© 2012 McGraw-Hill Ryerson Limited

4. Keynesian Transmission Process Keynesian monetary policy goals 1.Steady growth in real GDP 2.An exchange rate that ensures a viable balance of trade 3.Stable prices 4.Full employment LO2 9- 4© 2012 McGraw-Hill Ryerson Limited

5. Keynesian Transmission Process Transmission process - the Keynesian view of how changes in money affect (transmit to) the real variables in the economy - the interest rate provides the link between the money market and the goods market LO2 9- 5© 2012 McGraw-Hill Ryerson Limited

6. Contractionary Monetary Policy LO2 9- 6© 2012 McGraw-Hill Ryerson Limited

7. Contractionary Monetary Policy LO2 9- 7© 2012 McGraw-Hill Ryerson Limited

8. Contractionary Monetary Policy LO2 9- 8© 2012 McGraw-Hill Ryerson Limited

9. Contractionary Monetary Policy LO2 9- 9© 2012 McGraw-Hill Ryerson Limited

10. The Effects of Contractionary Monetary Policy LO2 9- 10© 2012 McGraw-Hill Ryerson Limited Potential GDPAS AD 1 AD 2 Y FE YEYE P contractionary monetary policy reduces AD1 to AD2 the inflationary gap (YE – YFE) is thereby closed contractionary monetary policy reduces AD1 to AD2 the inflationary gap (YE – YFE) is thereby closed

11. The Effects of Expansionary Monetary Policy LO2 9- 11© 2012 McGraw-Hill Ryerson Limited expansionary monetary policy increases AD1 to AD2 the recessionary gap (YFE - YE) is thereby closed expansionary monetary policy increases AD1 to AD2 the recessionary gap (YFE - YE) is thereby closed Potential GDP AS AD 1 AD 2 Y FE YEYE P

12. Criticisms of Keynesian Monetary Policy – The twin goals of full employment and stable prices are incompatible – May not be possible to achieve them together – The best a central bank can do is achieve a delicate balance between the two, without ever attaining either goal LO2 9- 12© 2012 McGraw-Hill Ryerson Limited