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Economics 12 (Part 3) (Monetary Policy (Overnight rate target (Chartered…

- - - - Demand for loanable funds
        
        Influences financial decisions
        
        Consumer:
        
        Major purchases
        
        Ex. Houses, automobiles
        
        Business:
        
        New investments
        
        Calculate rate of returns
        
        Extra revenue from investment
        
        Extra revenue > interest rate = invest
        
        Extra revenue < interest rate = no
        
        Government
        
        Not as affected
        
        Borrow money
        
        Interest costs paid by taxpayers
      - Changes in interest rates
        
        Affected by:
        
        Supply of loanable funds
        
        Rising employment = more income
        
        People spend and save more
        
        More money in account
        
        1 more item...
        
        Higher business profits
        
        More to save
        
        More supply
        
        Demand of loanable funds
        
        High employment level = demand increases
        
        People want to purchase immediately
        
        Businesses think investment is favourable
      - Higher interest rate = less demand
        
        People less likely to borrow
      - Value of dollar
        
        Maintain, raise, lower
      - Decision by business to invest
      - Supply of loanable funds
        
        Affected by:
        
        Individuals:
        
        Increasing or decreasing deposits
        
        Amount of money in account
        
        Avoid borrowing by saving
        
        More money in account
        
        Supply goes up
        
        Business:
        
        Amount of money in account
        
        Tend to save for future
        
        Banks
        
        Can create more money
  - - - Ex. large corporations
  - - - For chartered banks/financial institutions
  - - - Built into all interest rates
    - - Repay after 1 year
        
        4% inflation; worth 4% less
        
        Inflation premium covers loss
        
        Inflation premium of 4%
  - - - Inflation premium
      - Risk and credit-worthiness allowance
  - - - 0.5% lower than Bank rate
        
        0.5% range called operating band
    - - Charge interest rate
        
        Actual rate = overnight rate
        
        Overnight rate target controls it
      - Or other way around
      - To customers:
        
        Interest rate > Bank rate
        
        Chartered banks/financial institutions profit
  - - - Easy availability of credit
        
        Growth of money supply
    - - Bank government deposits => chartered banks
        
        Increase their reserves
        
        More likely to lend money
        
        Banks lower interest rates
    - - Lower interest rates
        
        More people borrow
        
        Need money for large purchases
        
        Increased consumer spending
        
        Businesses borrow for investments
    - - More borrowing increases money supply
        
        Increased output purchased throughout economy
    - - Aggregate demand increases
        
        GDP increases
        
        Employment increases
        
        Recession ends
  - - - Difficult availability of credit
        
        Decrease in money supply
    - - Government deposits back to Bank
        
        Chartered banks' reserve levels decrease
        
        Less money to lend
        
        Increase interest rates
        
        People less likely to borrow
    - - Higher interest rates
        
        Consumers don't want to borrow
        
        Less consumer spending
        
        Less consumer spending
        
        Businesses cut investments
    - - Less borrowing of money
        
        Less money supply growth
        
        Less spending
    - - Prices decrease
        
        Inflation lowers
- - - - Government of Canada bonds
        
        Canadian government borrows money
        
        Money repaid by fixed date
        
        Pays interest to lender
      - Foreign exchange
        
        Stock of foreign currencies
        
        Defends Canadian Dollar
        
        Mostly USD
        
        Some gold holdings
    - - The Bank lends money
        
        Money => chartered banks / financial institutions
        
        They use for own investments
        
        Charges Bank rate
    - - Currency outstanding
        
        Bank notes issued by Bank
        
        Paper money = liability to Bank
        
        Asset to people + Mr. G
      - Deposits of chartered banks
        
        Their balances at central bank
        
        Settles debts
        
        Act as reserves
        
        Central bank pays interest
      - Deposits of federal government
        
        "Chequing account" of government
        
        Government deposits revenues
        
        Makes payments from account