chapter 14 - monetary policy Flashcards
(14 cards)
monetary policy objective
control q of money & interest rates to avoid inflation & when possible prevent swings in real GDP growth & unemployment
two main benefits of an inflation-control target
- fewer surprises & mistakes on part of savers & investors
- target anchors expectations about future inflation
critics of inflation targeting fear that:
- by focusing on inflation, bank might permit unemployment rate to rise/real GDP growth to slow
2.if inflation edges up above the upper limit, the bank will rein in AD & push economy into recession
monetary policy instrument
variable that the bank of canada can directly control/closely target
bank of canada policy instruments are:
- quantity of bank reserves
- interest rates at which banks can borrow, hold, or lend reserves overnight
overnight rate
the interest rate banks charge each other on overnight loans
deposit rate
the interest rate paid by the bank of canada to banks on the balances of their reserve accounts
bank rate
interest rate paid by a bank to the bank of canada on an overnight loan of reserves
operating band
the bank of canada sets the bank rate and deposit rate to create a “corridor”
corridor system
the bank keeps the overnight rate close to the center of the operating bank by using open market operations to adjust the quantity of bank reserves
floor system
the bank keeps the overnight rate target at the floor of the operating band by using open market operations to adjust the quantity of bank reserves
when the bank lowers the overnight rate…
the quantity of money and the quantity of bank loans increase
the ripple effects that follow a change in the overnight rate change which 3 components of aggregate expenditure?
- consumption expenditure
- investment
- net exports
the bank of canada raises the overnight loans rate, describe ripple effects on monetary policy (up or down):
1. other short-term interest rates & exchange rate
2. q of money & supply of loanable funds
- rise
- decrease
