Chapter 29

Chapter 29 - Chapter 29 Money supply Vs the interest rate For any given money demand curve any central bank must choose between Setting the money

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 29 Money supply Vs. the interest rate For any given money demand curve, any central bank must choose between: o Setting the money supply o Setting the interest rate o There are therefore 2 different approaches to implementing the monetary policy. You can set the Money supply to a point where it causes the interest rate to change to allow for an equilibrium on the Md curve. A change in the interest rate will alter the quantity of money that is demanded, which would cause banks to increase the supply of money. The bank of Canada chooses to implement its monetary policy by setting the interest rates because: o The bank can influence an interest rate more easily than it can affect the money supply. o Instability of money demand – even though we know what causes the money demand to shift (price and output) it is hard to measure the demand for money – i.e. money demand curve is volatile so it’s more sufficient to lock down interest rates than money supply. o Easier to communicate its policy though changes in interest rates to the public rather than money supply. But which interest rate (of many) does the Bank influence? The bank of Canada and the overnight interest rate The Bank can more-or-less control the overnight interest rate ( market determined rate , and is the rate at which commercial banks lend to each other large amounts of money, over night). It does this by: o Setting a target for the overnight interest rate o Establishing the bank rate 0.25% above this target – this means that banks are
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/07/2009 for the course ECON 295 taught by Professor Ragan during the Spring '08 term at McGill.

Page1 / 4

Chapter 29 - Chapter 29 Money supply Vs the interest rate For any given money demand curve any central bank must choose between Setting the money

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online