Chapter 13: Interest Rates & Monetary Policy

• 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

• Income UP
• Demand for money UP
• Curve Shifts Right

• Income DOWN
• Demand for money DOWN
• Curve shifts left

• Increase supply of money
• Curve shifts right
• Interest Rate goes down

• Decrease supply of money
• Curve shifts left
• Interest Rate goes UP

• Determined by money demand and supply
• Occurs when people are willing to hold the exact amount of money being supplied by authorities

Interest Rates and Bond Prices are inversely related

• 1. Price Stability
• 2. Economic Growth
• 3. Full Employment

The buying and selling of bonds by the Bank of Canada to carry out monetary policy

The interest rate the Bank of Canada charges on advances made to chartered banks

Interest rate at which major participants in the money market borrow and lend one day funds to each other

• lowers overnight rate --->
• increases money supply --->
• lowers interest rates --->
• increase spending

• Increases overnight rate --->
• reduces money supply --->
• raises interest rates --->
• reduce spending

• Strengths
• a. Speed and flexibility
• b. Political Acceptability

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