ECON102 Lecture 20: CHAP 30, MONETARY POLICY (P2)
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MONETARY POLICY
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• ONLR>TARGET RATE: If BOC BUYS SECURITIES IT PAYS CHARTERED
BANKS, so we make transfer to the reserves then reserves increase
until the black dot
• ONLR<TARGET RATE: If BOC sells securities then banks pay for the
securities with reserves, so reserves will fall until they go up the black
dot.
• Why it’s important to hit the target rate?
o If inflation rate is higher than 3%, BOC conducts monetary
policy
o BOC increases bank rate & settlement balance rate by
increasing operating band and through selling securities to
increase ONLR; these will cause ONLR to rise
o Consequences: reserves fall so qty of money (monetary base)
fall cuz reserves is part of monetary base, so banks have less
reserves to give loans so loans decrease. Because there’s a
shortage of bank loans other short term interests rates
increase. This increase in IR will increase Canadian real interest
rate differential so exchange rate increase
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ECON102 Full Course Notes
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