Macroecon chapter 13 Flashcards
1
Q
Instruments of monetary policy (2)
A
- ΔMS
- Δi
2
Q
Why does BoC target i/Δi? (3)
A
- BoC control i (overnight interest rate ONR)
- Slope of MD is unclear
- Easy to communicate Δi to public
3
Q
Bank policy rate
A
ONR
4
Q
Bank rate (credit rate)
A
ONR + 0.25%
5
Q
Deposit rate
A
ONR - 0.25%
6
Q
Why is MS endogenous?
A
M0 (CC): Central bank money, monetary base
D: Deposit in commercial bank out of the direct control of BoC
7
Q
Open market operation
A
Passive/indirect strategies to control MS
8
Q
If buy bonds
A
Increase in M0 and MS
9
Q
If sell bonds
A
Decrease in M0 and MS
10
Q
Expansionary monetary policies (3)
A
- Increase in MS
- Decrease in ONR
- Open market purchase
11
Q
Contractionary monetary policies (3)
A
- Decrease in MS
- Increase in ONR
- Open market sell
12
Q
Why is BoC target inflation (3)
A
- Cost of inflation
- ΔMS => ΔP = ΔΛ
- Inflation targeting policy 1% ≤ Λ ≤ 3%
13
Q
How does BoC target Λ
A
Monitor the output gap rate
If Y>Yp => increase in price => increase Λ
14
Q
Gap rate formula
A
(Y - Yp)/(Yp) x 100
15
Q
Solution to positive shock on AD (increase in rate of inflation)
A
Contractionary monetary policy
