Econ Chapter 30
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The inflation control target is meant to be __ to __ percent with a trend inflation at a __ percent midpoint
Two main benefits flow from adopting an inflation-control target:
- Fewer surprises and mistakes on the part of savers and investors
- Anchors expecatations about future inflation.
Critics of inflation targeting fear that
1. By focusing on inflation, the Bank might permit ___
2. The Bank might permit_________
- the unemployment rate to rise or real GDP growth to slow
- the value of the dollar to rise on the foreign exchange market and make exports suffer.
As the sole issuer of Canadian money, the Bank of Canada can decide to control
- The quantity of money (the monetary base), or
- The exchange rate, or
- The short-term interest rate
The operating band is the________________________. So the operating band is 50 basis points (0.5 percentage points) wide.
target overnight rate plus of minus 25 basis points (0.25 percentage points)
The purchase of government of Canada securities - Treasury bills and government bonds - by the bank of Canada or to a chartered bank or the public is
An open market operation
When the Bank of Canada lowers the overnight rate:
1. Other short-term interest rates and the exchange rate:
2. The quantity of money and the supply of loanable funds:
3. The long-term real interest rate:
4. Consumption expenditure, investment, and net exports:
5. Aggregate demand:
6. Real GDP growth and the inflation rate :
Equilibrium in the market for loanable funds determines the
long-term real interest rate, which equals the
long-term nominal interest rate minus the expected inflation rate.
The ripple effects that follow a change in the overnight rate
change three components of aggregate expenditure:
- Consumption expenditure
- Net Exports
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