Goals+of+Monetary+Policy


 * Goals of Monetary Policy**

Jasmyn Solberg Econ 101 Assignment 1 April 11, 2011 Goals of Monetary Policy Monetary Policy – The Bank of Canada controls the money supply through interest rates through promoting economic growth and stability There are four goals of the Monetary Policy: 1. Steady growth in GDP 2. Exchange rate that is advantageous to trade 3. Stable prices 4. Full employment (no cyclical unemployment) The two primary goals of Canadian Monetary Policy are: 1. Stable prices 2. Exchange rates Canada achieves these goals by keeping the inflation rate between 1 – 3% and having favourable exchange rates. They want to make sure the exchange rates are advantageous to trade. The problem with trying to achieve these two goals simultaneously is that under the Keynesian Monetary Policy, while trying to close the expansionary and recessionary gaps, is that prices go up and will create inflation. The goals that the Monetarist Monetary Policy try to achieve is that they try to control the money supply to ensure that the quantity of money supplied is equal to the quantity of money demanded. They try to keep interest rates relatively constant which will grow the money supply with the economy, and stability in interest rates can come at the expense of the rest of the economy. The goals that the Keynesian Monetary Policy try to achieve is the closing of an expansionary gap, they use Contractionary monetary policy. They decrease demand to close the gap. For a recessionary gap, they use expansionary monetary policy. They increase demand to close the gap. The problem with this is that prices go up when trying to close the gap which will create inflation. They use the Monetary Policy to stabilize exchange rates. Using high interest rates to control inflation can make it difficult to service the national debt. An external source talking about Canada’s target inflation rate or preferred exchange rate is linked below: 1. [] This article came out yesterday talking about Canada’s target inflation between 1 and 3%. The Bank of Canada decided to keep the exchange rate unchanged at one percent. Staying at the one percent rate, Canada will be able to monitor things more and stay stable. As well, the Bank of Canada’s decision looked at the European hike in interest rates. They raised their rate to 1.25% and are experiencing the results.