1How does monetary policy affects the economy?
There is no doubt that national monetary policies pose a great impact on the economy of any country, that is, employment, income and investment. Theories trying to explain this mainly draw their arguments from the general nominal rigidity as applied in prices and wages. It therefore means that monetary policy has an impact on the economy due to the fact that workers and firms respond to the increase in liquidity through improved production rather than increasing the prices and or wages. Notably, there is a significant disparity in decision making as far as wage setting is concerned. Most theories put forth to explain this proves that there are great impulses brought forth as a result of the varying monetary policies, other factors kept constant.
The point at which monetary policy is implemented which often take the approach of decreasing or increasing of interest rates, affect both firm and people’s demands for both goods and services. In a nut shell, policy actions are known affect interest rates which subsequently affects the demands and by extension, inflation, output and employment.
2. Briefly discuss the adjustment mechanism in the Canadian economy following the plunge in oil prices
Inflation in Canada has seen a rapid evolution, something that has caught many by surprise. This has been followed by an even weaker economic activity as reflected in an October Report. A significant decline in trade matters including trade terms leading to the weakening of the dollar. To ensure that the dwindling economy is brought to normalcy, the Canadian government embraced a two way approach that entailed scaling back of the resource sector through investments and improvement in terms of activity in the non-resource sector. The country has also received a massive boost in its wake to revive its economy by taking advantage of the United States’ good will recovery policy which has created an atmosphere of stabilizing the Canadian dollar as well as accommodating the monetary and financial conditions of the country in the external markets.
Moreover, the Canadian government has set up a national scheme that ensures employment resilience, which together with the low rates of households support household costs which y extension, underpins the high demands in Canada.
3.a. What do you mean by conventional and unconventional monetary practices?
Conventional monetary practices are traditional activities that do not try to force a change in the economy. The economy is growing so no radical changes are needed. On the other hand, unconventional monetary practices are needed when the economy is stagnated and something must be done to force a change.
3.b. Briefly discuss two unconventional monetary policy tools that can be used by the Bank of Canada
An example of an unconventional monetary practice that is in the tool box when interest rates are very low is “forward guidance.” Forward guidance is based on the concept that if the outlook for inflation changes than the key policy rate will be changed. The reaction to forward guidance is that the longer-term interest rates are lowered, which sends a message to investors that the given policy rate will continue for a longer time. The yield curve is lowered by the action so more types of borrowers will be impacted. The desired result is that the demand will jump higher so the output will increase (and the inflation will increase).
Another unconventional tool is the use of “funding for credit.” There are times when the supply of credit is deficient or unavailable. During times like that some sectors still must borrow money to meet their obligations. Funding for credit comes in handy at those times for really important sectors, because the sectors that are essential to the economy are still allowed to borrow money.
4. Canadian LabourForce Data
Figure 1 Labour force survey estimates, Canada
The highest unemployment rate was in the group Males aged 15 to 24 years from December 1971 to June 2010. The other groups followed the same trends but fewer people were unemployed in the other three groups. Unemployment peaked for males 15 and over and male from 15 to 24 years old and for females 15 years and over and females 15 to 24 years old around December of 1978. Another peak in unemployment for the groups is indicated from September 1987 until after June 1989, the next peak is lower ranging from about 21% unemployment rate for males 15 to 24 to about 10% for females 15 years and over. Females over 15 remained at the lowest rates of unemployment from June 1996 to June 2010.
Figure 2 Labour force survey estimates, Canada
Figure 2 shows the employment rates for the time from December 1971 to June 2010. December 1971 to December 1982 was good for males over 15 and males in the 15 to 24 years group, but then a decline in employment started. The employment rate for the group males over 15 decreased by remained consistently above 65. The males 15 to 24 dropped to an unemployment rate under 50% during several periods. The unemployment rate for females from 15 to 24 years showed the largest range with a low of about 45% in December 1993 to a high of about 70% in December 1982.
Figure 3 Labour force survey estimates, Canada
Figure 3 show that Males in the group 15 to 24 were at the highest level of participation than the other groups from December 19771 to April 2010. The largest variation was in the Females group from 15 to 24 years with a high in participation in about June of 1983 and a low in participation about December of 1994
Figure 4 Labour force survey estimates, Canada Labour force survey estimates, Canada
Figure 4 is a composite of the three figures above. It shows that unemployment rates remained below participation and employment rates from December 1971 to December 2010.
Works Cited
Poloz, S.S. “Prudent preparation: The evolution of unconventional monetary policies.” Remarks. At the Empire Club of Canada, Toronto, Ontario. Bank of Canada. 8 December 2015.
Poloz, S.S., Wilkins, C., Lane, T., Côté, A., Schembri, L. and Patterson, L. “Monetary Policy Report.” Bank of Canada. pp. 1-34. January 2016. bankofcanada.ca.
