Class Chapt 11 & 12 Flashcards
What is The Bank of Canada’s job?
to control the quantity of money and interest rates in order to avoid inflation and, prevent excessive swings in real GDP
What is the Bank of Canada’s monetary policy instrument? 3 possible instruments
- The quantity of money (the monetary base)
- The price of Canadian money on the foreign exchange market (the exchange rate)
- The opportunity cost of holding money (the short-term interest rate)
can the Bank of Canada set all three variables?
Can only set one at a time.
If the Bank decreased the quantity of money, wat would happen to interest rate and the exchange rate ?
both would rise
If the Bank raised the interest rate what would happen to the quantity of money and the exchange rate?
the quantity of money would decrease and the exchange rate would rise.
If the Bank lowered the exchange rate, what would happen to the quantity of money and the interest rate?
the quantity of money would increase and the interest rate would fall
how does the Bank get the overnight loans rate to move to the target level?
by using open market operations to adjust the quantity of the monetary base.
when The Bank buys securities, what happens to the overnight loans rate?
it gets lower
What happens to the quantity of money and the supply of loanable funds when the Bank of Canada lowers the overnight rate?
quantity of money and the supply of loanable funds Increases
What is the Laffer curve?
The relationship between the tax rate and the amount of tax revenue collected.
What is the budget balance that would occur if the economy were at full employment and real GDP were equal to potential GDP.
The structural surplus or deficit
What is cyclical surplus or deficit?
is the surplus or deficit that occurs purely because real GDP does not equal potential GDP.
3 Time Lags:
-Recognition lag—the time it takes to figure out that fiscal policy action is needed.
-Law-making lag—the time it takes Parliament to pass the laws needed to change taxes or spending.
- Impact lag
