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Economics Unit 3 (Monetary Policy (Bank of Canada (Functions (Director of…

- - - - price charged for borrowing money
      - Role of Interest rates
        
        Affects consumer to save/borrow money
        
        Affects business' decision to borrow/expand
        
        Affects Demand for Canadian money
        
        Value of the dollar
        
        Supply+ Demand for Loanable Funds
        
        Interest Rate affects Supply and Demand
        
        Demand
        
        Consumers borrow money for large purchases
        
        Businesses borrow , calculating rate of return
        
        Rate of Return
        
        1 more item...
        
        Government
        
        Not affected by interest rate
        
        1 more item...
        
        Supply
        
        Business , money in deposit accounts
        
        Chartered Banks, by regulating money supply
        
        Individuals, money in deposit accounts
        
        Changes in Interest Rates
        
        Demand
        
        Fund demand increases (curve shifts right
        
        Increase rate during "good times"
        
        Fund demand decreases (curve shifts left)
        
        Decrease rate during "uncertain times"
        
        Supply
        
        During good times, people save more
        
        Curve shifts right, decrease rate
        
        During recession, people reduce savings
        
        Curve shifts left, increase rate
      - Different Types of Interest Rates
        
        Prime Rate
        
        financial institution's lowest interest rate
        
        Given to its best customers
        
        Bank Rate
        
        Bank of Canada's interest rate
        
        to chartered banks
        
        Determines rate to customers
        
        Inflation Premium
        
        Allowance for inflation
        
        built into all interest rates
        
        Nominal Interest rate
        
        Interest rate that includes:
        
        allowance for risk
        
        credit worthiness
        
        inflation premium
        
        Real rate of interest
        
        Nominal interest rate minus
        
        expected rate of inflation
    - - Director of Monetary policy
        
        Monetary Policy
        
        Influencing money and credit
      - Banker to the chartered bank
        
        Chartered Bank
        
        established by charter from government
      - Banker to the federal government
      - Issuer of currency
  - - - Stage 1
        
        The Bank shifts government deposits
        
        To accounts of chartered banks
        
        Lend more with increased reserves
        
        lowering interest rates attracts potential borrowers
      - Stage 2
        
        Lower interest rates encourage large purchases
        
        Consumers borrow for houses, car, appliances
        
        Businesses borrow more for stocks, plants
      - Stage 3
        
        New borrowings increase money supply growth
        
        From increased bank deposits and reserves
        
        The economy purchases increased output
      - Stage 4
        
        Increased consumer / business spending
        
        Increases Aggregate Demand and GDP
        
        Ends recession, leads to full employment
    - - Stage 2
        
        Higher interest rates discourage borrowing
        
        Consumers borrow for large purchases
        
        Businesses cut investment in stocks, plants
      - Stage 3
        
        Less borrowing decreases money supply growth
        
        Decreased reserves = Chartered banks can't lend
        
        Contributes to fall in spending
      - Stage 1
        
        The Bank shifts government accounts back
        
        From chartered banks to Bank of Canada
        
        Decreased reserves = less money lend out
        
        Raise interest rate with decreased supply
      - Stage 4
        
        Decreased consumer / business spending
        
        Decreases aggregate demand and prices
        
        Ends the period of high inflation
  - - - The Bank's tool to control inflation rate
        
        increase / decrease chartered banks' interest rate
      - Bank pays 0.5% less than Bank rate
        
        This 0.5% range is called operating band
      - Overnight rate target: operation band's midpoint
      - Banks trade with each other
        
        At the overnight rate
        
        The Bank states overnight rate target
    - - shift deposits buy/sell bonds
        
        influence short-term interest rates
        
        speed / slow down money supply growth
      - Assets
        
        Foreign Exchange
        
        stock of foreign currencies
        
        defend Canadian dollar on international markets
        
        Advances to the chartered banks
        
        The Bank lends money to chartered banks
        
        Charges interest (the Bank rate)
        
        Government of Canada Bonds
        
        Government sells bonds to the Bank
        
        Canadian government receives money from Bank
        
        Government promises to pay back
      - Liabilities
        
        Currency Outstanding
        
        all bank notes issued by Bank
        
        Asset to people, liability to Bank
        
        Deposits of the chartered banks
        
        Balances held by chartered banks
        
        to settle debts + act as reserves
        
        central bank pays interest
        
        Deposits of the federal government
        
        "chequing account" of the federal government
        
        government deposits revenues + pays expenses
- - - - A measure of value
      - A store of value
      - A medium of exchange
    - - Easily divided into units
      - Readily recognizable by shape + colour
      - Durable
      - Difficult to duplicate
        
        Oppose counterfeiting
      - portable and easy to use
      - MUST retain value over time
    - - Anything to purchase goods + purchases
        
        Must be accepted in economy