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.

Answer 1

Reason 1: When the BoC (central bank) is buying government bonds it would be beneficial because it would be financing the government budget deficit. The deficit arises when government spending is more than its tax revenue. So, the by buying government bonds, it is supplying more money in the economy.This would increase the aggregate demand in the economy. Aggregate spending rises. This would raise the output level in the country.

Reason 2: By expanding money supply in the country, it will lower the interest rates. The low interest rate means people would hold less money in bonds or in savings account and hold more money in hand and spend more. Another implication is that lower interest rate means cheaper cost of investment. it will be cheap to finance the investment projects by firm at lower interest rate. So, investment spending also rises, which causes aggregate demand to rise and output to rise.

So, for these two reasons, monetary policy would he helpful for the Canda to raise its output level.