CHAPTER 12: Monetary Policy

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CHAPTER 12 Monetary Policy
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Topics

• 12.1 Bank of Canada
• 12.2 Equilibrium Interest Rates
• 12.3 Monetary Policy goals tools
• 12.4 Overnight Lending Rate
• 12.5 Monetary Policy, GDP prices
• 12.6 Problems complications
• 12.7 International economy

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• Central Bank
• Government agency responsible for monetary
  policy and other financial functions.

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SECTION 12.1 Bank of Canada
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Bank of Canada

• Established 1935 Bank of Canada Act
• Crown corporation
• Managed by board of directors
• Governor Mark Carney

Mark Carney
Bank of CanadaVideo
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Bank of Canada

• FUNCTIONS
• Bankers bank
• Governments bank
• Sole issuer of currency
• Supervisor of commercial banks
• Regulator of the money supply

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MONETARY POLICYUsing money supply to influence
interest rates and stabilize the economy.
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Monetary Policy

• Expansionary Policy
• Easy money
• Lower interest rates
• Greater availability of credit

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Monetary Policy

• Contractionary Policy
• Tight money
• Higher interest rates
• Less availability of credit

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Interest Rates and Demand for Money
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Interest Rate i

• price of money
• inverse relationship between i and quantity of
  money demanded

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Demand for Money Dm

• MADE UP OF
• Transactions Demand Dt
• Asset Demand Da

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Demand for Money

• Transactions Demand Dt
• demand for money as medium of exchange
• largely independent of interest rate
• varies directly with nominal GDP

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The Demand For Money
Figure 12-1
Transactions Demand, Dt
i
10 7.5 5 2.5 0
Interest Rate
Dt
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
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Demand for Money

• Asset Demand Da
• demand for money as a store of value
• compare to other financial assets
• varies inversely with the interest rate

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The Demand For Money
Figure 12-1
Asset Demand, Da
i
10 7.5 5 2.5 0
Da
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
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The Demand For Money
Figure 12-1


Transactions Demand, Dt
Asset Demand, Da
i
i
10 7.5 5 2.5 0
10 7.5 5 2.5 0
Interest Rate
Dt
Da
0 50 100 150 200 250 300
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
Amount of money demanded (billions of dollars)
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The Demand For Money
Figure 12-1


Transactions Demand, Dt
Asset Demand, Da
Total demand for money, Dm
i
i
i
10 7.5 5 2.5 0
10 7.5 5 2.5 0
10 7.5 5 2.5 0
Interest Rate
Dm
Dt
Da
0 50 100 150 200 250 300
0 50 100 150 200 250 300
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
Amount of money demanded (billions of dollars)
Amount of money demanded (billions of dollars)
100 100 200
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Equilibrium
Demand Supply for money of money
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Money Market Equilibrium
Figure 11-1


Transactions Demand, Dt
Asset Demand, Da
Total demand for money, Dm
i
i
i
Sm
10 7.5 5 2.5 0
10 7.5 5 2.5 0
10 7.5 5 2.5 0
ie
Interest Rate
Dm
Dt
Da
0 50 100 150 200 250 300
0 50 100 150 200 250 300
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
Amount of money demanded (billions of dollars)
Amount of money demanded (billions of dollars)