Question

1. Given that the interest rate can be determined by the equilibrium of the demand and supply of money, the central bank could raise or lower the interest rate indirectly by increasing or decreasing the money supply. Does the Bank of Canada take this approach? Why or why not?
2. In March 2020, the Bank of Canada decided to lower the overnight interest rate from 75% to 0.25%.
   1. While the bank has a target for the overnight rate, the rate itself is market-determined. What is the bank rate and how does the Bank of Canada use it to influence the overnight rate?
   2. Briefly explain how a decrease in the overnight interest rates eventually results in a change in the money supply. Is the Bank of Canada active or passive in the money supply change?

Answer 1

Ans

The goal of financial approach is to save the estimation of cash by keeping expansion low, steady and predictable. This permits Canadians to settle on going through and venture choices with more certainty, empowers longer-term interest in Canada's economy, and adds to sustained employment creation and more noteworthy efficiency. This thus prompts enhancements in our way of life.

Canada's fiscal approach framework comprises of two key segments that work together: the expansion control target and the adaptable swapping scale. This framework helps make fiscal approach activities promptly justifiable, and empowers the Bank to exhibit its responsibility to Canadians.

At the core of Canada's money related approach framework is the swelling control target, which is two percent, the midpoint of a 1 to 3 percent target run. First introduced in 1991, the objective is set mutually by the Bank of Canada and the federal government and reviewed at regular intervals. Notwithstanding, the everyday lead of money related approach is the duty of the Bank's Governing Council. The swelling control target directs the Bank's choices on the fitting setting for the arrangement loan fee, which is aimed at keeping up a steady price condition over the medium term. The Bank reports its approach rate settings on fixed declaration dates eight times each year.

The Bank of Canada is detached in its choices with respect to the cash supply; it leads its open-showcase tasks to suit the changing demand for money originating from the business banks.