Ch.9 Monetary Policy

Question 1

___ acts as
- Currency Issuer
- Gov’s Bank & Manager of
Foreign Currency Reserves
- Banker’s bank & Lender of last resort
- Auditor/Inspector of
Commercial Banks
- Regulator of Money Supply

Answer 1

Central Bank / Bank of Canada

Question 2

2 Reasons/Demands
that ppl Hold Money

Answer 2

①Transactions DD for $$
$$ as medium of X
GDP↑(income↑CPI↑)⇒DD↑
autonomous

②Asset DD for $$
$$ as store of wealth
a. rainy day needs
b. buy big-ticket when low int. rate
Inversely Related to Int. Rate
Keynes: Motives of
Speculative & Precautionary

Question 3

___ is
- a % of Borrowed Amt
- Price of Money

Answer 3

Interest Rate

Question 4

Demand of Money
is determined by

Answer 4

①real GDP
=Level of Transactions
②Price Level
=Avg level of Transaction
③Interest Rate

Question 5

2 Causes of
Interest Rate ↑

Answer 5

①DD of $$ ↑
=貨幣流動 or
②Supp of $$ ↓
=貨幣緊縮

Question 6

2 Causes of
Interest Rate ↓

Answer 6

①DD of $$ ↓
=拿去投資 or
②Supp of $$ ↑
=貨幣寬鬆

Question 7

Monetary Policy
aims to achieve macroeconomic obj.
& consists of
mngt of ___ & ___

Answer 7

Money Supply
&
Interest Rates

Question 8

2 Tools that
Bank of Canada
changes money supply

Answer 8

①OMO
Open Market Ops
Buy/Sell T-Bills
(Short-term bonds)
②Switching Gov Deposits
BoC Deposits/Withdraws
gov depts deposits$$
from Commercial Banks

Question 9

A Policy US & UK applied recently to buy
1. Long-term Bonds
2. Shares
to ↑ Liquidity of Commercial Banks

Answer 9

Quantitative Easing
量化寬鬆

Question 10

In OMO open market ops
Gov buy bonds to __ Int Rate
& sell bonds to __ Int Rate

Answer 10

Gov buy bonds to ↓ Int Rate
($$ supp→ market)
& sell bonds to ↑ Int Rate

(bond’s int rate↓
∵no need to attact $$;
bond’s int rate↑
∵need to attact $$)

Question 11

2 Monetary Policies that
- ↑ / ↓ $$ in Economy
- ↓ / ↑ Int. Rate
- make Credit Cheaper / Expensive
- easier / harder to obtain

Answer 11

Expansionary MP
a.k.a. Easy Money Policy
貨幣寬鬆
/
Contractionary MP
a.k.a. Tight Money Policy
貨幣緊縮

Question 12

2 Criticisms of
Targeting Money Supply
by central banks

Answer 12

①Can’t affect Loans created
by commercial banks
②Can’t know DD for $$
⇒unsure effect of △$$ Supp

so stop using it

Question 13

The Interest Rate that
Central Bank sets for Commercial Banks to loan each other in short-term
to settle insufficient reserves

Answer 13

Overnight Int. Rate
Overnight Lending Rate
key policy/int rate

8 times/yr
target 2.5% overnight rate
for comm. banks
⇒2.25% & 2.75% for
BoC’s 50-basis-pt op band

Question 14

2 Reasons that BoC mainly
target Interest Rate
as Monetary Policy

Answer 14

①Ctrl ↑ to Int. Rate
②Easy Communication to the Public

Question 15

If Overnight rate > Target
BoC buy/sell Bonds?
↑ / ↓ $$ Supp?

Answer 15

Goal: ↓ Int Rate
⇐ ↑ $$ Supp
⇐ BoC BUY Bonds
($$ → market)

Question 16

If Overnight rate < Target
BoC buy/sell Bonds?
↑ / ↓ $$ Supp?

Answer 16

Goal: ↑ Int Rate
⇐ ↓ $$ Supp
⇐ BoC SELL Bonds
($$ ← market)

Question 17

△$$ Supp thru
△Int Rate to
affect variables (C/I) in Economy

Answer 17

Monetary Transmission Process

Question 18

How Expansionary/Contractionary Monetary Policy transmit $$ in Economy & Result

Answer 18

Gov ↑$$ Supp by buying bonds
⇒ int rate↓ ⇒ C/I ↑
& X rate ↓⇒Xn↑
⇒ GDP/CPI ↑ (Exp MP)
———
Gov ↓$$ Supp by selling bonds
⇒ int rate↑ ⇒ C/I ↓
& X rate ↑⇒Xn↓
⇒ GDP/CPI ↓ (Con MP)

Question 19

An Economic School of Thought that believes
△$$ Supp changes
Cyclical fluctuation
& GDP

Answer 19

Monetarism

Milton Friedman

Question 20

A Formula that Monetarist summarizes GDP determination

Answer 20

Equation of Exchange

MV = PQ = nom GDP

M: $$ Supp
V: Velocity of $$ (const.)
P: CPI
Q: real GDP (const.)

Question 21

2 Schools of Views to
Firm’s Sensitivity to △Int Rate

⇒Impact on Economy/GDP

Answer 21

Firm is __ to Int Rate
Monetarist: Sensitive (flat)
Keynes: Insensitive (steep)

⇒Impact on Economy/GDP
Monetarist: BIG
Keynes: small

Question 22

2 Schools of Views to
Ppl’s Sensitivity to △$$ Supp

Answer 22

Ppl are __ to $$ Supp
Monetarist: Insensitive (steep)
Keynes: Sensitive (flat)

Question 23

Monetarist believes that central banks should focus on doing their best i.e. ___
r/t fail from achieving many

Answer 23

Preserve INT/EXT
Value of Currency
= what BoC is doing
= anti-inflationary

i.e. keep $ & X Rate (inflation) stable

Question 24

3 Criticism of Anti-Inflationary Monetary Policy (high int rate) that Bank of Canada focuses on

Answer 24

① Econ Growth ↓
② Unemployment ↑
③ Budget Deficit ↑