Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition 1 What is a monetary rule, as opposed to a monetary policy? What monetary rule would Milton Friedman have liked central banks to follow? Why has support for a monetary rule of the kind advocated by Friedman declined since 1980? (Gl) Click the icon to view the additional information. What is a monetary rule, as opposed to a monetary policy? 2. A monetary rule is a plan for increasing the money supply at a constant rate regardless of the prevailing economic condition ©. A monetary rule is a plan for increasing taxes during inflation and reducing taxes during a recession, ‘A monetary rule is a plan where the Bank of Canada reduces the money supply during a recession and increases the money supply during inflation A monetary rule is a plan for increasing government spending during a recession and reducing government spending during inflation, Milton Friedman would have liked central banks to follow a monetary rule where the money supply is kept unchanged as Milton Friedman did not want central banks to intervene with the market economy. 8. interest rate is increased every year by a percentage rate equal to the long-run growth rate of real GDP. money supply is inereased every year by a percentage rate equal to the short-run growth rate of nominal GDP. 2D. money supply is increased every year by a percentage rate equal to the long-run growth rate of real GDP. Support for a monetary rule of the kind advocated by Friedman declined since 1980 because 34. the relationship between changes in the money supply and changes in real GDP and the price level has become weaker 8. other countries that follow inflation targeting have had less than a desirable effect on their economy. the large following of Milton Friedman has dwindled since 1980s. central banks had actually practiced inflation targeting for a few years before the 1980s with very unfavorable results. Page |Selvin Naidu Instructor: Doug McClintock “Assignment: Chapter 11-B fed: 03/30/15 7:33pm, Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition More Info (cont) crn Some economists have argued that the Bank of Canada should use the money supply, rather than the interest rate, as its monetary policy target. Milton Friedman and other monetarists argued that central banks should adopt a monetary growth rule of increasing the money supply every year at a fixed rate. Support for this proposal declined after 1980 because the relationship between movements in the money supply and movements in real GDP and the price level weakened. John Taylor analyzed the factors involved in central bank decision ‘making and developed the Taylor rule for overnight interest rate targeting. The Taylor rule links the central bank?s target for the overnight interest rate to economic variables. ‘The Bank of Canada adopted inflation targeting 2conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation?back in 1991, and its performance in the 1990s and 2000s generally received high marks from economists, Over the past decade, many economists and central bankers have expressed significant interest in using inflation targeting. A number of foreign central banks have adopted inflation targeting, including the US Federal Reserve. YOU ANSWERED: nothing nothing, nothing Page 2Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition 2 What do economists mean by the demand for money? Itis the monetary value of total wealth of individuals. Itis the amount of money—currency and checking account deposits—that individuals hold. It is the amount of currency, checking account deposits and stocks and bonds that individuals hold. It is the amount of money—currency and checking account deposits—that individuals use to pay for one transaction per day. What is the advantage of holding money? * Currency and checkinng account deposits held by individuals earn substantial interest income. ‘An individual pays little or no taxes on the amount of money he holds Money held by an individual can be used to measure one's wealth. Money can be used to buy goods, services, or financial assets. What is the disadvantage of holding money? ea, Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest. Money is not very “liquid.” Money can be easily stolen or lost. Money cannot be readily used to buy financial assets. YOU ANSWERED: nothing nothing, nothing Page 3Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition Stock prices rose rapidly in 2005, as did housing prices in many parts of the country. By 2008, both stock prices and housing prices were declining sharply. Some economists have argued that rapid increases and decreases in the prices of assets such as shares of stock or houses can damage the economy. Currently, stabilizing asset prices is not one of the Bank of Canada’s policy goals. In what ways would a goal of stabilizing asset prices be different from the four goals listed in this chapter? A. Asset prices are profits to individuals and are important to the economy as well. 2%. Asset prices deal with a specific type of wealth that carries risk associated with individual firms, ‘Asset prices are exactly the same as the other types of goals, D. None of the above, Stabilizing asset prices should not be added to the list of the Bank of Canada's policy goals because they are more specific and deal mainly with individuals and firms. Each of these carry risk associated with them and the Bank of Canada should not be in the business of trying to make profit for individuals. Is this true or false? False * True More Info The Goals of Monetary Policy The Bank of Canada has set four monetary policy goalsthat are intended (o promote a well-functioning economy: 1 Price stability 2 High employment 3 Economic growth 4 Stability of financial markets and institutions YOU ANSWERED: nothing empty Page 4Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition [Related to Making the Connection] Even though the core PCE is a better measure of the inflation rate than is the CPI, the CPI is still more widely used because the core PCE includes energy and food prices, which do not affect the cost of living of a typical consumer. Is the statement above true or false? True * False Which of the following are reasons why the federal government uses the CP! when deciding how much to inerease Social Security payments to retired workers to keep the purchasing power of the payments from declining? The government likes to stick it to the people. ®. ‘The core PCE better measures the cost of living. 26. The CPI continues to be the most widely used measure of inflation. D. None of the above, More Info Making the Connection How Does the Bank of Canada Measure Inflation? To attain its goal of price stability, the Bank of Canada has to consider carefully the best way te inflation rate. As we saw in Chapter 5 , the consumer price index (CPI) is the most widely used inflation, But we also saw that the CPI suffers from biases that cause it to overstate the true unc inflation. An altemative measure of changes in consumer prices can be constructed from the da calculate GDP. We saw in Chapter 4 that the GDP deflator is a broad measure of the price leve! price of every good or service that is in GDP. Changes in the GDP deflator are not a good meas experienced by the typical consumer, worker, or firm, however, because the deflator includes p a industrial equipment, that are not widely purchased. ‘The Bank of Canada uses the rate of change in the CPI to measure inflation because it is the mc and understood price measure in Canada. The Bank of Canada’s inflation targets are specified headline CPI? (all items), but it also uses 2core CPI,? which excludes volatile components (su and the effect of indirect taxes) as a measure of the headline rate?s trend, For example, prices 0 tend to fluctuate up and down for reasons that may not be related to the causes of general inflat Page $(cont) Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition easily be controlled by monetary policy. Oil prices, in particular, have moved dramatically up a ‘years. Therefore, a price index that includes food and energy prices may not give a clear view ¢ in inflation. ‘The following graph shows movements in the CPI and the core CPI from January 1993 throug Although the two measures of inflation move roughly together, the core CPI has been more stal Note in particular the period in late 2009 when the CPI was indicating that the economy was ex deflation, but the core CPI was still showing moderate inflation rates of about 2 percent. If you want to know what the Bank of Canada thinks the current inflation rate is, the best idea is to look at data on the core CPI. Annual inflation Source: Statistics Canada, CANSIM II series V41690914 and V41690926. YOU ANSWERED: empty nothing Page 66. Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition A recent article by leading economist Frederic S. Mishkin, "Monetary Policy Strategy’ Lessons from the Crisis," concludes that the field of macro/monetary economies has become a hell of a lot more exciting. We are now faced with a whole new agenda for research that should keep people in the field very busy for a very long time. Tt has also made the work of central bankers more exciting as well. They now have to think about a much wider range of policy issues than they had to previously. This will surely be exhausting, but central banking will be a far more stimulating profession. Frederic $, Mishkin, "Monetary Policy Strategy: Lessons from the Crisis,” Working paper, Graduate School of Business, Columbia University and National Bureau of Economic Research, December 2010. What are the policy issues that economists and central bankers are concerned with in the aftermath of the global financial crisis and the Great Recession? They have perfect instruments for money supply controlling proved throughout history. ©. Economists believe rethinking of the tax rate policy would have a huge impact on the economy of Canada and would keep pulling it from recession, KC. They say, major rethinking is required regarding how monetary policy affeets the economy and conduction of financial stability policy. Central bankers and economists state that all the policies should be conducted and monitored by the government, so those policies would be more precise in terms of their effectiveness. YOU ANSWERED: nothing If monetary policy is so effective at helping the economy stabilize and protecting against recessions, why does recovery take so long and why are the monetary policy effects not always readily apparent? Policymakers have less-than-perfect understanding of the extent of effects policy actions would have on aggregate demand, 8. ‘The operation of the economy changes over time and, with it, the response of the economy to policy measures, Information about the state of the economy is limited because of lags in the publication data. 20. Allof the above. YOU ANSWERED: nothing Page 7Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition 2 How can investment banks be subject to liquidity problems? Investment banks can be subject to liquidity problems because they borrow from households and firms in the form of checking and savings deposits. they are highly regulated and are taxed very heavily. they ofien borrow long term, sometimes as long as thirty years, and invest the funds in shorter-term investments. 4 they offen borrow short term, sometimes as short as overnight, and invest the funds in longer-tem investments. YOU ANSWERED: nothing Page 8Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition 8. The following excerpt is from a July 2010 Financial Post article: ‘The Bank of Canada raised its benchmark policy rate Tuesday by 25 basis points to 0.75 per ce scaled back its growth outlook on the belief budget cutting among households and government: economies will ‘temper’ the pace of the global recovery. Many of Canada?s commercial banks 1 raising their prime lending rates. Paul Viera, "Bank of Canada Raises Key Interest Rate to 0.75 Per Cent," Financial Post, July 2 http://www. globalnews.ca/bank+of+canada+raises+key+interest+rate+to+075+per+cent! a, What is the name of the "benchmark policy rate” mentioned in this article? the discount rate the prime rate the mortgage rate 20. the overnight interest rate b. Who borrows money and who lends money at this "benchmark policy rate"? 24. Banks borrow and lend, ©. The Bank of Canada borrows, other banks lend, Banks borrow, investors lend. Banks borrow and the Bank of Canada lends, €. What is the "prime lending rate"? ‘The prime lending rate is the rate at which the Bank of Canada lends to other banks. ©. ‘The prime lending rate is the rate at which banks lend to each other. ‘The prime lending rate is the rate at which auto loans and mortgages are made. 4D. The prime lending rate is the rate at which banks lend to their best customers. YOU ANSWERED: nothing nothing nothing, Page 9Selvin Nada Instructor: Doug MeClintock Assignment: Chapter 11-B fed 03/30115 7:33pm, Course: ECON 203 Winter 2015 - Section 08 Book: Hubbard‘O'Brien/Seretis/Chile: Macroeconomics, Canadian Fdition Beginning in 2008, the Bank of Canada and the U.S. Federal Reserve responded to the financial erisis by intervening in financial markets in unprecedented ways. (LG) Click she icon to view the additional information. Which of the following is one of the unprecedented actions of the Bank of Canada and the Federal Reserve? Buying Treasury bills and bonds on the open market. Making loans to banks through the discount window. 20. Making loans to primary dealers and holders of mortgage-backed securities. Allof the above. A and B only, More Info Se Pieiuneis ea ‘A bubble in the US housing market that began to deflate in 2006 led to the global recession of 200772009 and an accompanying global financial crisis. In response, central banks around the ‘world, including the Bank of Canada, instituted a variety of policy actions to protect their economies. In a series of steps, the Bank of Canada cut the target for the overnight interest rate from 4.5 percent in July 2007 to 0,25 percent in April 2009. uss the policies central banks used during the 2007 = 2009 ‘The US Federal Reserve also cut the target for the federal funds rate from 5.25 percent in September 2007 to effectively zero in December 2008. The decline in the US housing market caused wider problems in the global financial system, as defaults on home mortgages rose and the value of mortgage-backed securities deciined. Central banks around the world implemented a series of new policies to provide liquidity and restore confidence. They expanded the types of firms eligible for loans from the central bank and began lending direct to corporations by purchasing commercial paper. In the United States, under the Troubled Asset Relief Program , the US Treasury provided financial support to banks and other financial firms in exchange for part ownership. The Treasury also moved to have the federal government take control of Fannie Mae and Freddie Mac, government-sponsored firms that play a central role in the US mortgage market. ‘The failure of the investment bank Lehman Brothers in September 2008 led to a deepening of the global financial crisis and provided the motivation for some of the new monetary policies. Ultimately, the new policies stabilized the financial system, but their long-term effects remain the subject of debate. YOU ANSWERED: nothing Page 10Selvin Naidu Instructor: Doug McClintock “Assignment: Chapter 11-B fed: 03/30/15 7:33pm, Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition (cont) Page 11Instructor: Doug McClintock “Assignment: Chapter 11-B ‘Submitted: 03/30/15 7:33pm Course: ECON 203 Winter 2015 ~ 10. Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Macroeconomies, Canadian Edition If the Bank of Canada believes the economy is about to fall into recession, what actions should it take? If the Bank of Canada believes the inflation rate is about to increase, what actions should it take? (GQ) Click the icon to view the additional information. Ifthe Bank of Canada believes the economy is about to fall into recession, it should use a contractionary monetary policy to lower the interest rate and shift AD to the left. ©. use an expansionary fiscal policy to inerease the interest rate and shift AD to the right. use its judgment to do nothing and let the economy make the self adjustment back to potential GDP. 2 ©. use an expansionary monetary policy to lower the interest rate and shift AD to the right. If the Bank of Canada believes the inflation rate is about to increase, it should mA, use a contractionary monetary policy to increase the interest rate and shift AD to the left 8. use a combination of tax increases and spending cuts to keep the budget balanced. use a contractionary fiscal policy to increase the interest rate and shift AD to the left. ©. use an expansionary monetary policy to lower the interest rate and shift AD to the right. More Info jarning Objective #3: Use aggregate demand and aggregate supply graphs to show the leffects of monetary policy on real GDP and the price level ‘An expansionary monetary policy lowers interest rates to increase consumption, investment, and net exports. This increased spending causes the aggregate demand curve (AD) to shift out ‘more than it otherwise would, raising the level of real GDP and the price level. An expansionary monetary policy can help the Bank of Canada achieve its goal of high employment. A contractionary monetary policy raises interest rates to decrease consumption, investment, and net exports. This decreased spending causes the aggregate demand curve to shift out less than it otherwise would, reducing both the level of real GDP and the inflation rate below what they would be in the absence of policy. A contractionary monetary policy can help the Bank of Canada achieve its goal of price stability. YOU ANSWERED: nothing Page 12Instructor: Doug McClintock “Assignment: Chapter 11-B. ‘Submitted: 03/30/15 7:33pm Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Macroeconomies, Canadian Edition 10. (cont) nothing 11 Which one of the following is not one of the monetary policy goals of the Bank of Canada? (Lol) Click the icon to view the additional information. Choose the correct answer below. Maintain high employment. ©. Maintain stability of financial markets and institutions. ©. Reduce income inequality. Maintain price level. More Info ep eer er etree) Monetary policy is the actions the Bank of Canada takes to manage the money supply and jerest rates to pursue its macroeconomic policy goals. ‘The Bank of Canada has set four monetary policy goals that are intended to promote 2 well-functioning economy: price stability, high employment, stability of nancial markets and institutions, and economic growth. YOU ANSWERED: nothing Page 13Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition 12, In the fall of 201 1, investors began to fear that some European governments, particularly Greece and Italy, might default on the bonds they had issued, making the prices of the bonds fall sharply. Many European banks owned these bonds, and some investors worried that these banks might also be in financial trouble. An article in the Economist magazine referred to the prospect of another Lehman moment.” The article noted that, "Governments are once again having to step in to support their banks." Source: "Mere We Go Again," Economist, October 8, 2011, What did the article mean by a "Lehman moment"? A "Lehman moment” meant the beginning of a "Great Recession.” 8. the beginning of a steep inflation. ©. a deepening of the financial crisis brought about by bankruptcy of a major bank. a decisive action by a Central bank to "bail out" a troubled bank. Why might European governments have felt the need to support their banks in order to avoid another Lehman moment? 2. The European governments wanted to avoid wider economic repercussions resulting from bank failures that could undermine the financial positions of other firms and lead to a further reduction in prices of financial assets. 8. ‘The European banks are nationalized and they need government support. ‘The European countries are usually welfare states and they do not want banks to fail ‘The European Union instructed the European governments to help Greece and Italy, YOU ANSWERED: nothing nothing Page 14Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition In response to problems in financial markets and a slowing economy, the Bank of Canada cut 1 target overnight interest rate to an all-time low. BMO Capital Markets economist Michael Gregory said that, ‘Quantitative easing [expanding the money supply] is looming. I see printing money, high-powered money, as providing excess reserves in the banking system, so the banks will do something with that extra money." "Bank of Canada Cuts Key Interest Rate to 0.25%," CBC News, http://www..cbc.ca/news/business/story/2009/04/2 1/bank-canada-rate.htmliixzz14nj1Wr What is the relationship between the overnight interest rate falling and the money supply expanding? Cutting the overnight interest rate increases saving, which increases the money supply. ke. To decrease the overnight interest rate, the Bank of Canada must increase the money supply. Cutting the overnight interest rate increases the money supply. Cutting the overnight interest rate increases bank reserves, which inereases the money supply. How does lowering the target overnight interest rate provide the banks with "extra money"? 4 To increase the money supply, the Bank of Canada sells bonds on the open market, whic inereases bank reserves. To increase the money supply, the Bank of Canada decreases taxes, which increases constumer spending. To increase the money supply, the Bank of Canada increases government spending, whic increases aggregate demand. %*D. To inerease the money supply, the Bank of Canada buys bonds on the open market, whic increases bank reserves. YOU ANSWERED: nothing nothing Page 154, Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition Some economists argue that one cause of the financial problems resulting from the housing crisis in the United States was the fact that lenders who grant mortgages no longer typically hold the mortgages until they are paid off, Instead, lenders usually resell their mortgages in secondary markets. How might a lender intending to resell a mortgage act differently than a lender intending to hold a mortgage? The lender might require larger down payments ®. ‘The lender might require more documentation of borrower incomes. 2c. The lender might make more risky loans. ©. The lender might make shorter term loans. YOU ANSWERED: nothing Page 16Selvin Naidu Instructor: Doug McClintock “Assignment: Chapter 11-B fed: 03/30/15 7:33pm, Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition 15. ‘What is the Taylor rule? (le) Click the icon to view the additional information. Choose the correct answer below. It is a rule that links national debt to the annual budget deficit. It is a rule that links the unemployment rate to the rate of inflation 6 This a rule that links the Bank of Canada's target for the overnight interest rate to the current inflation rate, real equilibrium overnight interest rate, inflation gap and output gap. It is a rule that links the Bank of Canada's target for long-term mortgage rates to economic variables such as the current inflation rate, real equilibrium overnight interest rate, inflation gap and output gap. ‘What is the purpose of the Taylor rule? The Taylor rule is used to analyze how the equilibrium overnight interest rate is determined. analyze and predict how the Bank of Canada targets the inflation rate kc. analyze and predict how the Bank of Canada targets the overnight interest rate. explain how the output gap and inflation gap are related. More Info Some economists have argued that the Bank of Canada should use the money supply, rather than the interest rate, as its monetary policy target. Milton Friedman and other monetarists argued that central banks should adopt a monetary growth rule of increasing the money supply every year at a fixed rate, Support for this proposal declined after 1980 because the relationship between movements in the money supply and movements in real GDP and the price level weakened, John Taylor analyzed the factors involved in central bank decision making and developed the Taylor rule for overnight interest rate targeting, The Taylor rule links the central bank?s target for the overnight interest rate to economic variables. Page 1715. (cont) Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition The Bank of Canada adopted inflation targeting 2conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation?back in 1991, and its performance in the 1990s and 2000s generally received high marks from economists, Over the past decade, many economists and central bankers have expressed significant interest in using inflation targeting, A number of foreign central banks have adopted inflation targeting, including the US Federal Reserve. YOU ANSWERED: nothing nothing Page 1816. Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition An article by three economists at the Federal Reserve Bank of Richmond notes that by the fall of 2011, many ‘unemployed people in the United States had been out of work for more than six months. The economists argue that: "After a long period of unemployment, affected workers may become effectively unemployable." They conclude that: "Policy options [such as providing additional training] that increase the ability of unemployed workers to find work " may be more effective at reducing unemployment than additional monetary stimulus." Source: Andreas Hornstein, Thomas A. Lubik, and Jessie Romero," Potential Causes and Implications of the Rise in Long-Term Unemployment,” Federal Reserve Bank of Rlehmond, Economic Brief September 2011. What is a policy of monetary stimulus? It is a policy of cutting income taxes. ©. Itis an expansionary monetary policy which lowers interest rates. It is a contractionary monetary policy which raises interest rates. It is a policy of expanding unemployment compensation If many unemployed people have been out of work for a long time, why might policies that increase their ability to find jobs be more effective in reducing unemployment than a policy of monetary stimulus? Monetary stimulus only affects interest rates but not the unemployment rate. ©. Monetary stimulus is not very effective in a recession because it adds to the budget deficit. Expansionary monetary policy's positive effect on employment dies down in the long-run 2D. Long-term unemployment is due to the mis-match between the skills that are in demand and the skills that unemployed workers have. Policies such as additional training can mitigate such unemployment by making workers better skilled, YOU ANSWERED: nothing nothing, Page 19Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition 17, Why is price stability one of the Bank of Canada's monetary policy goals? ko If inflation is low, the Bank of Canada will have flexibility to lessen the impact of recessions, Ri ig prices erode the value of money as a medium of exchange and store of value. By achieving price stability, the Bank of Canada also promotes economic growth, All of the Above. Which of the following is not a problem of high inflation rates? ko High inflation creates difficulties for the Bank of Canada to conduct monetary policy. High inflation reduces the real value of money. High inflation reduces economic growth. High inflation helps to stabilize financial markets. More Info The monetary policy refers to the actions the Bank of Canada takes to manage the money supply and interest rates to pursue its economic objectives YOU ANSWERED: nothing nothing Page 20Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition 18, [Related to Making the Connection] If policymakers at the Bank of Canada are aware that GDP data are sometimes subject to large revisions, how might this affect their views about how best to conduct policy? They would have been more cautious about designing a policy. They would have gathered as much information as possible before designing a policy. ‘They would have better understood the uncertainty of the outcome of a policy. 29. All of the above. More Info Making the Connection Trying to Hit a Moving Target: Making Policy with "Real-Time Data" The Fed relies on macroeconomic data to formulate monetary policy. One key piece of economic data is GDP, which is calculated quarterly by the Bureau of Economic Analysis (BEA). Unfortunately for Fed policymakers, the GDP data provided by the BEA are frequently revised, and the revisions can be large enough that the actual state of the economy can be different from what it at first appeared to be. The BEA's advance estimate of a quarter's GDP is not released until about a month after the ‘quarter has ended, This delay can be a problem for policymakers because it means that, for instance, they will not receive an estimate of GDP for the period from January through March until the end of April, Presenting even more difficulty is the fact that the advance estimate will be subject to a number of revisions. The second estimate of a quarter's GDP is released about two months after the end of the quarter. The third estimate is released about three months after the end of the quarter. Although the BEA used to refer to the third estimate as the "final estimate," in fact, it continues to revise its estimates through the years. For instance, the BEA releases first annual, second annual, and third annual estimates one, two, and three years after the third estimate, Nor is that the end, because benchmark revisions of the estimates will occur in later years, Why so many estimates? Because GDP is such a comprehensive measure of output in the economy, it is very time-consuming to collect the necessary data. To provide the advance estimate, the BEA relies on surveys carried out by the Commerce Department of retail sales, ‘and manufacturing shipments, as well as data from trade organizations, estimates of government spending, and so on. As time passes, these organizations gather additional data, and the BEA is able to refine its estimates. Page 2118, (cont) Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition Do these revisions to the GDP estimates matter? Sometimes they do, as the following example indicates. At the beginning of 2001, there were some indications that the U.S. economy might be headed for recession, The dot-com stock market bubble had burst the previous spring, wiping out trillions of dollars in stockholder wealth, Overbuilding of information technology also weighed on the economy. The advance estimate of the first quarter's GDP, though, showed a reasonably healthy increase in real GDP of 2.0% at an annual rate. It seemed as if there was nothing for government policymakers to be worried about. But, as the graph below shows, that estimate of 2.0% was revised a number of times over the years, mostly downward. Currently, BEA data indicate that real GDP actually declined by 1.3% at an annual rate during the first quarter of 2001. This swing of more than 3 percentage points is a large difference—a difference that changes the picture of what happened during the first quarter of 2001 from one ‘of an economy experiencing moderate growth to one of an economy suffering a significant decline. The National Bureau of Economic Research dates the recession of 2001 as having begun in March, but some economists believe it actually began at the end of 2000. The current BEA estimates of GDP provide some support for this view. trea GOP This example shows that in addition to the other problems the Federal Reserve encounters in successfully conducting monetary policy, it must make decisions using data that may be subject to substantial revisions. Sourees: Federal Reserve Bank of Philadelphia, "Historical Data Files for the Real-Time Data Set," August 24, 2010; and Bruce T. Grimm and Teresa Weadock, "Gross Domestic Product: Revisions and Source Data," Survey of Current Business, Vol. 86, No. 2, February 2006, pp. 1-5. YOU ANSWERED: nothing Page 2219, Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition According to an article in the New York Times, an official at the Bank of Japan had the following explanation of why monetary policy was not pulling the country out of recession: Despite recent major inereases in the money supply, he said, the money stays in banks. James Brooke, "Critics Say Koizumi’s Economic Medicine Is a Weak Tea," New York Times, February 27, 2002. 5 x In the quote, when the official says "the money stays in banks,” he is referring to an increase’ in the reserves in banks. ° x But the real problem was that banks were not lending. the reserves. The reason for this may have been a lack of borrowers. More Info Monetary policy refers to the actions the Bank of Canada takes to manage the money supply and interest rates to pursue its economic objectives. YOU ANSWERED: nothing nothing nothing Which of the following is not a correct comparison between an expansionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model” If the economy is below full employment, expansionary monetary policy will cause an increase in the price level in both models. ©. ‘The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static. In the dynamic model, expansionary policy would be used when demand does not grow sufficiently; in the basic model, expansionary policy would be used when demand fall. 20. All of the above are correct statements about the two models. ©. None of the above are correct statements about the two models, YOU ANSWERED: nothing Page 23Instructor: Doug McClintock “Assignment: Chapter 11-B ‘Submitted: 03/30/15 7:33pm Course: ECON 203 Winter 2015 ~ 21 Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Macroeconomies, Canadian Edition ‘What is the overnight interest rate? What role does it play in monetary policy? (le) Click the icon to view the additional information. The overnight interest rate is A. the interest rate that the banks charge for loans to its important commercial borrowers. 5. the interest rate that banks charge each other for overnight loans. the required reserve ratio that the Bank of Canada requires banks to maintain, the interest rate that the Bank of Canada charges for its loans to banks. ‘The overnight interest rate is not important for the Bank of Canada's monetary poliey since households and firms are not directly affected by any adjustment of this rate, 2 ©. very important for the Bank of Canada's monetary policy because the Bank of Canada uses the federal funds rate as a monetary policy target since it can control the rate through open market operations, very important for the Bank of Canada's monetary policy because it is administratively set by the Bank of Canada very important for the Bank of Canada's monetary policy because individual borrowers pay this interest rate for mortgage loans. More Info tee amuses euet tet ‘The Bank of Canada’s monetary policy targets are economic variables that it can affect directly and that in tum affect variables such as real GDP and the price level that are closely related to the Bank of Canada’s policy goals. The two main monetary policy targets are the money supply and the interest rate, The Bank of Canada has most often chosen to use the interest rate as its ‘monetary policy target. The Bank of Canada announces a target for the overnight interest rate after each meeting. The overnight interest rate is the interest rate banks charge each other for overnight loans. To lower the interest rate, the Bank of Canada increases the money supply. To raise the interest rate, the Bank of Canada decreases the money supply. Page 2421 (cont) Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition In a graphical analysis of the money market, when the money supply curve shifts to the right, the result is a movement down the money demand curve and a new equilibrium at a lower interest rate. When the money supply curve shifts to the left, the result is a movement up the money demand curve and a new equilibrium at a higher interest rate. YOU ANSWERED: nothing nothing Page 25Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition The hypothetical information in the following table shows what the situation will be in 2015 if the Bank of Canada does not use monetary policy. Year Potential Real GDP Real GDP Price Level 2014 $15.2 willion $15.2 willion 110.0 2015 $15.6 trillion $15.8 willion 1155 a. If the Bank of Canada wants to keep real GDP at its potential level in 2015, it should use a contractionary * policy. The trading desk should be selling T-bills. b. If the Bank of Canada's policy is successful in keeping real GDP at its potential level in 2015, state whether each of the following will be higher, lower, or the same as it would have been if the Bank of Canada had taken no action: i, Real GDP will be lower than it would have been if the Bank of Canada had taken no action. ii, Full-employment real GDP will be the same as" it would have been if the Bank of Canada had taken no action. ili, The inflation rate will be lower than ™ it would have been if the Bank of Canada had taken no action, iv, The unemployment rate will be higher than” it would have been if the Bank of Canada had taken no action YOU ANSWERED: nothing nothing nothing nothing nothing nothing Page 262. Instructor: Doug McClintock “Assignment: Chapter 11-B Course: ECON 203 Winter 2015 ~ Section 08 Book: Hubbard/O'Brien/Scrletis/Childs: Mactocconomies, Canadian Edition Explain whether you agree with this argument; If the Fed actually ever carried out a contractionary monetary policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the 1930s, we can conclude that the Fed has not carried out a contractionary policy since the 1930s, The statement is uncertain because it is not possible to determine what policies the Fed hhas chosen. © The statement is true. If there had been a contractionary policy, the price level would have fallen. KC. The statement is false. A contractionary policy could result in a lower rate of inflation rather than a fall in the price level ‘There is not enough information to tell whether the statement is true or false. YOU ANSWERED: nothing Suppose that the equilibrium real overnight interest rate is 5 percent and the target rate of inflation is 3 percent. Use the following information and the Taylor rule to calculate the federal funds rate target Current inflation rate = 4 percent Potential real GDP = $1.54 trillion Real GDP = $1.42 trillion ‘The overnight target interest rate is $.60°%. (Round your response to two decimal places.) More Info Inflation targeting is associated with conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation. More Info ‘Taylor rule is a rule developed by John Taylor that links the central bant’s target for the ‘overnight interest rate to economic variables. YOU ANSWERED: nothing Page 27