CIA4U1 – Money & and Monetary Policy
What is Money?
 Functions: Means of exchange; unit of measurement; store of value
Definitions & Components of the Money Supply
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Know what types of accounts make up the four definitions of the money supply (M1, M2, M2+,
M2++; M3)
Near money
Money substitutes
Interest rates control the money supply
Bank of Canada monitor’s money supply growth
Canadian Financial & Banking System
 Consists of chartered banks, near banks and one central bank
 How is this different from the U.S. system?
 Also includes other financial institutions that aren’t chartered
 Six big banks account for 90% of total assets
 Schedule 1 and Schedule 2 banks exist in Canada, as well as other financial institutions
Bank of Canada
 How is it operated?
 Who is the governor?
 Two sets of functions:
 Government’s bank
 Bank’s bank
Demand for Money
Different types of demand for money – transactions demand; asset demand etc
Canada’s Money Supply
Equilibrium in the Money market
Monetary Policy
What is the Bank of Canada’s approach to Monetary Policy?
How is Monetary Policy carried out?
What are the benefits?
What is the difference between Monetary and Fiscal Policy?
Creation/Destruction of Money
How is money created in Canada’s banking system
Monetary Theory
 relationship btw money supply and economic conditions
 FISHER EQUATION (The Equation of Exchange) - MV=PQ
Keynesian Theory – why people hold money
 Transactions; precautionary & speculative demand
 Total demand for money
 Effects of increase/decrease int eh money supply on the demand for money.
Monetary Policy – action taken by the Bank of Canada in order to regulate the economy through changes
in the money supply
 Changes in the Bank Rate (ie interest)
 What is the Bank Rate
 What is the target for overnight rate
 What is the connection btw the 2
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Changes in the Money Supply
The BofC main tool for Monetary policy is : __________________________
Expansionary Monetary Policy vs Contractionary Monetary Policy – what is it?; when is it used?;
graph it
Transmission Mechanism
 Monetary policy affects interest rates and the exchange rate – how does this impact inflation (see
flow chart)
Why Monetary Policy Matters:
 Why inflation?
 Low inflation is desirable
 Stable output growth is desirable
 Monetary policy is forward looking
 Two types of uncertainty
Inflation targeting
 What is the BofC inflation target?
 How does the BofC maintain this target?
 Why is the BofC mainly concerned with inflation?
Limitations of Monetary Policy
 Timing of effects – Time lags – 18-24 months – why?
 Location of effects – Monetary Policy is a National Policy
Past 30 years Monetary Policy: (See summary handout)
 1980s
 1983-1987
 1988
 1992
 Present
“Carney issues warning to Europe”
 What does Monetary policy in Canada have to do with Europe
 Terminology: stagflation; recession; fiscal austerity; tight credit
 Canada’s current Bank Rate – when is the next announcement due – after May 29
 When was the last time the BofC changed the benchmark rate? Why is it not changing the rate?
 Mark Carney’s opinion of Monetary Policy in Canada – what and why?