Question

Give two reasons why the Bank of Canada's (BoC) policy of buying Government bonds may be beneficial. Be specific about what is at stake and how this monetary policy may be beneficial. Provide two reasons why this monetary policy may be risky. What is at stake?

Answer 1

Benefits of BOC buying govt buying bonds :

this is a type of expansionary monetary policy and the benefits of this are :

1. This will lead to a rise in the money supply in the market. The rise in money supply is seen due to govt pumping in money in the market by buying bonds which are further used by banks to lend that money , hence rising the circulation of money in the market.

2. With increase in the money supply , the general GDP rate also rises as the investment of the money increase in the Market which in tern help with rise in aggregate demand and employment levels and thus the total GDP rate.

This monetary policy can be risky as :

1. A rising borrowing rate will rise the rate of inflation in the market. This rising inflation causes the real wages to fall for the labours.

2. The rising inflation also causes the depreciation of the domestic currency. This falling of domestic currency will cause the foreign borrowing to be more expensive and in result it becomes more difficult for the govt to return the foreign lendings.