Unit 4 - Ch 13- Adjusted

8/9/2019 Unit 4 - Ch 13- Adjusted

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Copyright © 2012 by McGraw-Hill RyersonLimited. ll rights reser!ed.

Understanding Economics6th edition

by Mark Lovewell


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UnderstandingEconomics

Chapter 13

Monetary PolicyCopyright © 2012 by McGraw-Hill Ryerson Limited !ll rights reser"ed

#th editionby Mar$ Lo"ewell


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Learning %b&ecti"es!'ter this chapter yo( will be able to)

1 disc(ss the *an$ o' Canada and its '(nctions

2 e+plain the tools the *an$ o' Canada (ses tocond(ct monetary policy

3 identi'y the tradeo, between ination and(nemployment



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.he *an$ o' Canada /a .he *an$ o' Canada per'orms 'o(r basic

'(nctions)t manages the money s(pply

t acts as the ban$ers ban$) holding deposits o' members o' the Canadian

ayments !ssociation

ma$ing ad"ances to C! members at the ban$ rate



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.he *an$ o' Canada /bt acts as the 'ederal go"ernments 4scal agent) holding some o' the go"ernments ban$ deposits

clearing the go"ernments che5(es

handling the 4nancing o' the go"ernments debt byiss(ing bonds /incl(ding Canada 6a"ings *onds andtreas(ry bills

t helps s(per"ise the operations o' 4nancial

mar$ets to ens(re their stability .he *an$ wor$s in con&(nction with the %7ce o' the

6(perintendent o' 8inancial nstit(tions9 and 'ollows theglobal g(idelines o' the *asel Committee on *an$ing6(per"ision

.he s(ccess o' Canadas 4nancial s(per"ision hasrecei"ed considerable attention since the 200: creditCopyright © 2012 by McGraw-Hill RyersonLimited. ll rights reser!ed.


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.he *an$ o' Canada /cCanadian 4nancial instit(tions were less

a,ected by the meltdown than mostind(striali;ed co(ntriesCanadian 4nancial reg(lators had banned high-

ris$ mortgage lending9 while Canadian 4nancialinstit(tions were less acti"e than many o' theirglobal co(nterparts in trading ris$y deri"ati"es

Canadas large ban$s had lower le"erage ratiosthan many o' their global co(nterparts

.he Canadian property mar$et had nots(cc(mbed to the same b(bble conditions as in

some other co(ntriesCopyright © 2012 by McGraw-Hill RyersonLimited. ll rights reser!ed.


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#


"he Money Mar#et

$%antity o& Money'( billions)

* o m i n a l + n t e r e s t R a t e ' , )

0 0 0 /0 0

1

2

/

"he conomy

Real G3'2002 ( billions)

3 r i c e L e ! e l ' G 3 d e & l a t o r 4

2 0 0 2 5 1 0 0 )

0 670 67/ 800 80/

10

10

120

110

100

a

b

c

d

e

Sm0

Sm1

Dm

AD0

AD1

AS

3otential9%tp%t

+nitial Recessionary Gap


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Contractionary Monetary olicy /a

Contractionary monetary policy is)a policy o' decreasing the money s(pply and

raising interest rates9 which shi'ts != le'twardby a magni4ed amo(nt d(e to an initialdecrease in in"estment and the cons(mption o'd(rable goods

(sed to eradicate an inationary gap



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Contractionary Monetaryolicy /b8ig(re 1329 page 3>?

Copyright © 2012 by McGraw-Hill Ryerson Limited. ll rights reser!ed.

"he Money Mar#et

$%antity o& Money'( billions)

* o m i n a l + n t e r e s

t R a t e ' , )

0 0 0 /0 0

1

2

/

Dm

Sm1 Sm0

a

b AD1

AS

AD0

c

d

e

3otential9%tp%t

"he conomy

Real G3'2002 ( billions)

3 r i c e L e ! e l ' G 3 d e & l a

t o r 4

2 0 0 2 5 1 0 0 )

0 670 67/ 800 80/

10

10

120

110

100

1/0

+nitial +n&lationary Gap


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%pen Mar$et %perations%pen mar$et operations are a tool the *an$ o'

Canada (ses to cond(ct monetary policy! sale o' bonds lowers a C! members deposit

liabilities and reser"es9 which ca(ses amagni4ed decrease in the money s(pply (singthe money m(ltiplier! p(rchase o' bonds raises a C! members

deposit liabilities and reser"es9 which ca(ses amagni4ed increase in the money s(pply (singthe money m(ltiplier



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! *ond 6ale8ig(re 1339 age 3>@


*an$ o' Canada

!ssets Liabilities

Cartier *an$s =eposit -A1000*onds -A1000

Cartier *an$

!ssets Liabilities

*ondholder !s =eposit -A1000Reser"es at *an$ o' Canada -A1000


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! *ond (rchase8ig(re 13B9 age 3#0


Cartier *an$s =eposit A1000*onds A1000

*ondholder !s =eposit A1000Reser"es at *an$ o' Canada A1000

*an$ o' Canada

!ssets Liabilities

Cartier *an$

!ssets Liabilities


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Changes in the .arget %"ernight

Rate /a Changing the target o"ernight rate is a tool

the *an$ o' Canada (ses to signi'y itsmonetary policy intentionsDhen the *an$ o' Canada changes its target

band 'or the o"ernight rate it also a(tomaticallyad&(sts the ban$ rate since this rate is at thetop end o' the target band



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Changes in the .arget %"ernight

Rate /b! rise in the target o"ernight rate signi4es a

contractionary policy in the near '(t(rewhile a 'all in the target o"ernight ratesigni4es an e+pansionary policy

' the change in the target o"ernight rate iss(bstantial9 then deposit-ta$ers also ad&(sttheir prime rate9 which is the lowestpossible rate charged on loans to deposit-ta$ers best corporate c(stomers



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.he *ene4ts and =rawbac$s o'

Monetary olicyMonetary policy has two main bene4ts)t is separated 'rom day-to-day politics

=ecisions regarding monetary policy can be made5(ic$ly

Monetary policy has two main drawbac$s)t is less e,ecti"e as an e+pansionary tool than as

a contractionary tool

t cannot be 'oc(sed on partic(lar regions



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.ypes o' nation .here are two main types o' ination)=emand-p(ll ination occ(rs as rightward shi'ts

in the != c(r"e p(ll (p prices

Cost-p(sh ination occ(rs as le'tward shi'ts inthe !6 c(r"e p(sh (p prices



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=emand-(ll nation8ig(re 13>9 age 3#3


3 r i c e

L e ! e l ' G 3 d

e & l a t o r 4

2 0 0 2 5 1 0 0 )

Real G3 '2002 ( billions)

6/0 6600

10

1/0

AD0

AD1

AS

b

a


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.he hillips C(r"e /a .he hillips c(r"e is a graph showing the

ass(med in"erse relationship between(nemployment and ination8rom 1@#0 to 1@?2 the Canadian hillips c(r"e

was relati"ely stable

8rom 1@?3 to 1@:2 the Canadian hillips c(r"eshi'ted rightward res(lting in stagation

8rom 1@:3 to 2010 stagation was re"ersed b(tno constant hillips c(r"e emerged



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.he hillips C(r"e8ig(re 13#9 age 3#3


:nemployment Rate ',)

+ n & l a t i o n R a t e

' , )

0 2 8 10

2

8

10

b

c

a


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Cost-(sh nation8ig(re 13:9 age 3#>


Real G3 '2002 ( billions)

3 r i c

e L e ! e l ' G 3 d e & l a t o r 4

2 0 0 2 5 1 0 0 )

6/0 660

10

0

1/0

AD

AS0

AS1

c

d


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.he 6el'-6tabili;ing


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.he 6el'-6tabili;ing


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Money Matters /aMilton 8riedman was a leading s(pporter o'

monetarism9 which stresses the in(ence o'money in the economyCentral to monetarism is the "elocity o' money

/E9 which is the n(mber o' times money is spenton 4nal goods and ser"ices d(ring a gi"en year

E is 'o(nd by di"iding nominal G= by the money

s(pply /M



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Money Matters /b .hese calc(lations lead to the e5(ation o'

e+change9 M + E F + 9 where is the pricele"el and is the le"el o' real o(tp(t

!ccording to the 5(antity theory o' money9accepted by monetarists9 both E and arerelati"ely stable9 which means thatad&(stments in are d(e to changes in M



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Money Matters /c*ased on 8riedmans theories9 monetarists

consider "ariations in the money s(pply to bethe most signi4cant 'actor in the economy9

with changes in M translating immediatelyinto changes in nominal G= and the pricele"el

!ccording to monetarists9 central ban$ssho(ld not (se discretionary policy9 b(t adopta set monetary r(le instead



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! Crisis .oo 8ar /%LC

.he 200: Meltdown .he credit meltdown o' 200: was the most

serio(s 4nancial crisis since the 1@2@ crash n6eptember) .wo 6 p(blic-sponsored mortgage pro"iders

8reddie Mac and 8annie Mae were nationali;ed

Lehman *rothers 'aced ban$r(ptcy9 and the 6go"ernment too$ o"er mega-ins(rer !G

n %ctober9 stoc$ mar$ets t(mbled worldwide9and the ban$ing systems in se"eral co(ntrieswere on the "erge o' collapse

Go"ernments responded with emergencymeas(res



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.he Meltdowns Ca(ses

/a! spec(lati"e b(bble in real estate began in

many co(ntries in the 1@@0s9 dri"en by ane+tended period o' low interest ratesn the 69 the b(bble was worsened d(e to the

a"ailability o' s(bprime mortgages geared toborrowers with wea$ credit ratings9 partlythan$s to the bac$ing o' 8reddie Mac and

8annie Mae



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/bCollaterali;ed debt obligations /C=%s are

collections o' a certain class o' sec(rity sold inpac$ages %riginally meant to help manage

ris$9 they began to be (sed in spec(lati"e waysI eg the pac$aging o' C=%s based onmortgages9 especially o' the s(bprime "ariety

Credit de'a(lt swaps /C=6s gi"e holders a

g(arantee that the s(pplier will pay the '(ll"al(e o' the swaps (nderlying 4nancial sec(rityi' the (nderlying sec(rity de'a(lts



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/cn the early 2000s9 C=6s began to be (sed as a

'orm o' ins(rance on 4nancial sec(rities9 withthe 4rms iss(ing them liable to ma$e h(ge

payments in the case o' e+tensi"e de'a(lts onthe (nderlying sec(rities



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! Crisis .oo 8ar /%LC

.he Meltdowns mpact%nce the credit meltdown hit9 4rms and

go"ernment agencies with large holdings o'C=%s9 as well as iss(ers o' C=6s9 'acedcrippling losses

.he res(lt has been a new consens(s that

comple+ 4nancial instr(ments re5(ires newmethods o' 4nancial reg(lation



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Unit 4 - Ch 13- Adjusted

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