EC140 Chapter Notes - Chapter 28: Output Gap, Inflation Targeting, Redistribution Of Income And Wealth
21
EC140 Full Course Notes
Verified Note
21 documents
Document Summary
Difficult to know slope/position of md curve. Difficult to know when md curve will shift. Boc targets the overnight ir rate charged on loans between commercial banks. Announces a bank rate, 0. 25 percentage points above the overnight rate offers to lend money to commercial banks at this rate. Sets a deposit rate 0. 25 percentage points below the overnight rate. Commercial banks have an incentive to set their overnight rates close to the target: money supply is endogoneous. As demand for new loans grows, banks need more reserves to make these loans. Banks can sell government securities for cash reserves. Called open-market operations how boc changes currency in circulation. Boc chooses to set policy to affect the economy. Expansionary - reducing ir increases i,c,nx leads to expansion in ad. Uncertainty about inflation makes it hard for firms/individuals to plan investments. Long-term inflation is commonly cause by monetary policy.
