Chapter 12 Flashcards
Bank of Canada
owned by federal government but it is a totally independent institution. The governor of the bank of Canada is hired by the federal government
United States central bank
“fed” and consists of 12 banks that form a common board of directors.
4 Functions of the Bank of Canada
- Currency Maintainance
- Banker of Government
- Bank of Commercial banks
- Implement monetary policy
Currency Maintainance
printing money and counterfeit prevention
Banker of Government
Gives gov loans and manages gov debt + deposits. Manages reserves of foreign currency
Bank of commercial banks
Lender of last resort ; if a commercial bank is not able to borrow from anybody its last option is to borrow from the bank of Canada
Implement Monetary Policy
It manages the money supply to control inflation
Inflation control targeting
The key objective of monetary policy in Canada is to keep inflation control between 1% and 3% , around 2%. (peep graph). Once the inflation rate goes out of the range the bank of Canada will use the monetary policy to bring it back.
Instruments of bank of canada to affect money supply
- Open Market Operations
- Reserve Ratio
- Targeting overnight rate
Open market operations
buy and selling government bonds
Reserve Ratio
fraction (%) of deposits that commercial banks keep as reserve cash.
Targeting overnight rate
Bank of Canada sets a range for overnight rate.
Overnight loan
Short-term loan for 24 or 48 hours between commercial banks
Overnight rate
interest rate paid on overnight loans ; in Europe the call it LIBoR, London inter bank offer rate.
Bank rate
Interest rate paid by a commercial bank to the bank of Canada when it borrows from it. is above target rate by 0.25%
Deposit Rate
Interest rate received by a commercial bank on its deposits with the bank of Canada. is below target rate by 0.25%
Velocity of circulation
How many times a $ is used in transactions on average during a year, constant inflation rate, fixed value.
Inflation happens when:
there is too much money to by few goods and services
The Main cause of inflation is
that money supply grows faster than real GDP production
The Main cause of inflation is
that money supply grows faster than real GDP production
The quantity theory of money
Shows the relation between the inflation rate and the growth rate of money supply relative to our production.
Excess Reserves
Extra reserve that can be given as a loan.
Excess Reserves
Extra reserve that can be given as a loan.
