Chapter 13: Interest Rates & Monetary Policy

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Anonymous
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145721
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Chapter 13: Interest Rates & Monetary Policy
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2012-04-04 14:22:48
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Interest Rates Monetary Policy
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Chapter 13: Interest Rates & Monetary Policy
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  1. What are the two demands for money?
    • 1. Transactions Demand
    • Amount of money desired varies directly with nominal GDP (households will want more money for transactions if prices rise/output increases)

    2. Asset Demand
  2. Shifts in Money Demand
    • Income UP
    • Demand for money UP
    • Curve Shifts Right

    • Income DOWN
    • Demand for money DOWN
    • Curve shifts left
  3. Shifts in Money Supply
    • Increase supply of money
    • Curve shifts right
    • Interest Rate goes down

    • Decrease supply of money
    • Curve shifts left
    • Interest Rate goes UP
  4. What is the Equilibrium Interest Rate?
    • Determined by money demand and supply
    • Occurs when people are willing to hold the exact amount of money being supplied by authorities
  5. How are Interest Rates and Bond Prices related?
    Interest Rates and Bond Prices are inversely related
  6. What is the objective of Monetary Policy?
    • 1. Price Stability
    • 2. Economic Growth
    • 3. Full Employment
  7. Describe Open Market Operations
    The buying and selling of bonds by the Bank of Canada to carry out monetary policy
  8. What is the Bank Rate?
    The interest rate the Bank of Canada charges on advances made to chartered banks
  9. What is the Overnight Lending Rate?
    Interest rate at which major participants in the money market borrow and lend one day funds to each other
  10. Explain EXPANSIONARY MONETARY POLICY
    • lowers overnight rate --->
    • increases money supply --->
    • lowers interest rates --->
    • increase spending
  11. Explain RESTRICTIVE MONETARY POLICY
    • Increases overnight rate --->
    • reduces money supply --->
    • raises interest rates --->
    • reduce spending
  12. Expansionary Policy STRENGTHS and WEAKNESSES
    • Strengths
    • a. Speed and flexibility
    • b. Political Acceptability

    • Weaknesses
    • a. Time Lags
    • b. Potential reduced effectiveness during recession

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