You heard in the news that Bank of Canada has just lowered the policy overnight rate...

You heard in the news that Bank of Canada has just lowered the policy overnight rate to 0.25% due to the economic catastrophy of Corornavirus.

Does this signal the Bank is moving to to more expansionary or contractionary monetary policy? Explain in detail.

In your opinion why did the bank lowered the policy overnight rate?

Solutions

Expert Solution

a. Lowering of overnight rate signals expansionary monetary policy. Due to the outbreak of Corornavirus, the economy has taken a hit significantly. So, the Bank of Canada lowered the interest rate so that economy runs smoothly.

b. Lowering of the policy overnight rate helps the businesses to borrow money at a lower rate. In the absence of revenue, the borrowed money can be used pay the employees and suppliers so that the business relationship is kept intact in this difficult situation. In the absense of money, the economy comes to a stand still. If there is no revenue, the businesses cannot pay its suppliers and employees, and if they don't get paid, they don't have money to spend. If they don't spend, the companies cannot generate revenue. It is a vicious cycle. In order to break this cycle, it is important that the businesses borrow money and put that money in the hands of people and then people make purchases and the growth cycle continues.

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