Group 5 - Central Banks & Monetary Policy Flashcards
What is ‘monetary policy’?
Monetary policy is how the bank of Canada manages the Canadian economy using monetary policy:
Th purpose of monetary policy is to maintain:
Stable prices
Ensure low inflation in society &
Support steady GDP growth
Which essentially is done through controlling money supply and setting interest rates
What are the two types of monetary policies?
- Expansionary policies
- Contractionary policies
What is a expansionary policy?
+ Expansionary policy is put in place by the Bank of Canada when there’s an recession or when the economy is growing too slow.
What does the Bank of Canada do when they put the ‘expansionary policy’ in place?
First, Central banks reduce the interest rates in the economy to overall make borrowing cheaper. What this does is it encourages businesses and consumers to take out loans for either investments or spending. When they do this it essentially makes the economy increase in it’s money supply .
Sometimes the Bank of Canada might inject money into the economy called quantitative easing. When they do this more money is flowing through the economy and because people are buying more goods and services there’s an increase inflation as businesses may raise there prices in response to higher demand for goods and services.
As companies will make more money in this stage, they would grow and need more employees and because of this there’s usually a reduction in umemployment.
What is QE?
quantitative easing is when the bank of canada buys back government bonds and other securities pushing more money into the economy and increasing the money supply in the country.
What is the contractionary policy?
This policy is inputted by the bank of Canada when the economy is growing too fast
What does the Bank of Canada do when they put the ‘expansionary policy’ in place?
First,
What the Bank of Canada does is they increase interest rates.
When they do this it makes borrowing for businesses and consumers more expensive essentially making the economy spend less. When the economy is spending less it slows down demand for (goods or services).
In some cases the Bank of Canada might do something called Quantitative tightening which is when they sell bonds or other securities to absorb the money in the economy and reduce money supply.
When they do all of this it reduces the demand for G&S and helps stabilize both prices and inflation in society. However it does lead to an increase in unemployment as businesses might lay off workers due to these policies.
What are some global events that had impacted inflation worldwide? (Talk about the covid pandemic)
The Covid Pandemic initially caused a drop in both demand and inflation as it caused all economies to slow down.
However after countries reopened, demand increased and so did inflation due to things such as :
- supply chain issues
- labor shortages
- pent-up demand
Showing how a global event can cause economic disruptions that lead to inflationary pressures.
What are some global events that had impacted inflation worldwide? (Talk about the Russian-Ukraine war)
The war caused a lot of conflict globally as it created a lot of supply shortages in terms of food and energy;
As this happened it drove inflation higher in Europe and essentially affecting every day costs for people
What is the yield curve control policy that the Bank of Japan uses?
+ What this does is that it keeps intrest rates very low sometimes even negative.Involves targeting specific interest rates for different time horizons by buying or selling government bonds to maintain these levels.
What this does it aims to stimulate the Japan’s economy by keeping borrowing costs low, which encourages businesses and consumers to take loans and spend money, promoting economic growth.
How is Japan battling with defltaion (OECD)?
+ Historically we can see Japan has struggled with deflation) and because of this is due to Japan’s aging and shrinking population, which results in lower demand for goods and services and a reduced labor force.
+ How their battling deflation is with their low-interest policy to encourage spending but it causes long-term struggle.
How does the YCC impact currency?
How it impacts currency is that it leads to weaker yen compared to currencies from countries with higher interest rates, like the U.S. dollar or the euro.
This is because investors seek higher returns elsewhere, putting downward pressure on the yen.
Pros and Cons:
Pros: A weaker yen makes Japanese exports cheaper for other countries, which benefits Japan’s export-oriented economy (e.g., companies like Toyota, Sony).
Cons: A weaker yen increases the cost of imports, particularly energy and food, which Japan relies on heavily. This can hurt consumers and businesses that rely on imported goods.
What is the yen-carry trade?
The yen carry trade involves borrowing funds in Japan where interest rates are low and using these funds to invest in higher-yielding assets in other countries.
+ Investors take the advantage of Japan’s low interest rates borrowing in yen to buy assets in countries with higher interest rates (e.g., U.S. bonds). The profit comes from the difference between the low borrowing cost in Japan and the higher returns from foreign assets.
+ This bad because when investors borrow i yen and invest somewhere else it puts downward pressure on the yen (due to selling yen for foreign currencies) and upward pressure on foreign asset prices.
What has Japan does recently to help strengthen the YEN?
The Bank of Japan raised interest rates and reduce bonds purchases making it more expansive for investors to borrow in yen for carry trades strengthens the YEN.
What are some things that can effect monetary policy when discussing the US election?
+ Dollar strength:
Trump proposed tax cuts and tarrifs on imports that can boost the US dollar
+ Federal reserve approach: Flecible rate cuts to support economic growth
