MACROECONOMICS

Macroeconomics

Macro Economic Policies- The Canadian Government

Introduction

Bank of Canada's main task is to maintain stability of the Canadian dollar. In practice this means that it formulates and implements monetary policy to serve as a bulwark to inflationary pressures.

Discussion

Canada is a federal state, which is establishing itself as one of the most stable economies in the world. An economic policy that is being achieved to its diversified their industry. Therefore, the deficit has had 5% of its GDP, is converted into a surplus of around 2% in 2010 (www.bankofcanada.ca).

Bank of Canada has no direct authority over the money supply, because the deposits are subject to decisions by the private banking system. Using business deposits and households to make loans, commercial banks create money; somehow, as stated in theory the interest that is generated shall be injected into the banking sector. Nevertheless, this power to create money held by commercial banks is limited by two factors. Initially, when the rate of Interest from other financial assets are on the rise, Canadians choose to keep only a relatively small portion of their assets in cash, bank notes and bank deposits (which do usually a low-interest).

Second, banks can not lend all the money entrusted to them, because they must retain some reserves (mostly in the form of cash in their vaults or deposits with the Bank of Canada) to meet demands withdrawal of their customers. On fluctuating bank reserves and interest rates, Canada central bank indirectly influence the supply of money through high accuracy, especially over periods of three to six months or more (www.statcan.gc.ca).

One method used to manipulate the money supply, called the open market operation, is to market the Canadian government securities on the secondary markets for treasury bills and bonds. The purchase of government bonds by the Bank of Canada results in an immediate increase in the money supply of public and higher reserves of the banking system, which increases the entirety supply of money indirectly. Furthermore, increase desired for Treasury bills as well reduces the demands on the performance of these bonds, resulting in an overall decrease in interest rates. In contrast, when the Bank of Canada sells Treasury bills, the money supply decreases and interest rates rise.

Canada flow of income model-source Bank Of Canada

Controlling the supply of money considered as a dominant instrument to influence the common behavior of the Canadian economy. For example, monetary stimulus (that is ...