1. How does Monetary Policy Affect the Economy?
Monetary policy is a strategy by which a monetary authority of a given state or country formulates with intent to regulate the supply of money in the country targeting stabilization of interest rates to ensure general trust in the currency (Poloz 10). Monetary policies serve to stimulate the economic growth in various dimensions as a long run way to control inflation. These policies affect the primary business when they are executed by the stipulated standard modules used in the policy analysis. When the central bank lowers interest, households and firms adjust to the policy change that gives them purchasing power. Economic growth stimulants not only involve more people working (more labor) or more machine deployed to do the job (capital) but robust technological advancements that would boost productivity.
Global falling oil prices have largely contributed to deteriorating inflation in Canada where the CPI inflation has remained close to the Canadian central bank control range (Bozhechkova 14). The downward pressure exerted by inflation of consumer energy prices has fallen to 2% due to weaker economic activity than it was projected to the year 2015. The decline of Canadian terms of trade and Canadian dollar since 2014 has forced the Canadian monetary authority to set complex adjustments involving significant shifts in economic activity and relocation of labor. The soaring unemployment has affected the resource sector rates in the country triggering instability in purchasing power of the nationals. Inflation has also affected economic activities in the non-commodity exports (Cobham 3). The last depreciation of Canadian dollar has exerted upward pressure on imported consumer goods in Canada passed through by the exchange rates affecting farm produce and other sectors such as clothing and books. The graph below illustrates effects of participation of men and women over 15 years of age in Canada.
2. Discuss adjustments mechanism in the Canadian economy following the plunge in oil prices.
Canadian monetary authority has faced enormous challenges in controlling inflation as well as strategizing and implementing measures to control inflation. Economic activities in the country have been adversely affected by the low commodity prices in the market. Little activity in trade has led to Canadian dollar losing value for the recent years of economic slowdown (Bozhechkova 20). The financial authority has introduced complex adjustments such as shifting business as well as relocating labor and capital investments. The Canadian economy evolved in the aspects of resource sector and capital investments. The policy seeks to address weaker commodity prices, job losses due to the slow growth in production.
The monetary policy facilitates the reallocation of productive resources to the non-resource segment of the economy (Cobham 4). This has been triggered by the deteriorating exchange rate of the Canadian dollar, and, therefore, the strategy aims to restore established non-resource sector. Total CPI is recorded below 2% with a projection of it through the year 2016 making a significant downward pressure on consumer energy goods and prizes. The global falling oil prices mostly affected depreciation of the dollar, inflation was higher than anticipated in the year 2015. The output is in progress in different sectors of the economy is expected to revamp significantly in the non-commodity exports that have been associated with the production of motor vehicles at some plants that had been initially shut down.
3. The meaning of conventional and non-conventional monetary policies
The conventional monetary strategy is a monetary policy tool that is used in a country’s interbank money market to set overnight interest rate target (Poloz 6). The central bank regulates the supply of money in the market using market operations. The strategy manages the risks associated with central bank’s liquidity and balance sheet at all times. Management of interest rates provides consumer purchasing power and stabilizes prices over a short term. The process involves a broad range of policies that are employed to regulate the cost and availability of external finances to households and companies.
The regulation of long-term interest rates is one of the key monetary policies that can work for the Canadian government to manage the money market expectations. These can work through radical central bank reduction of real interest rates by inducing public expectation of higher price levels shortly (Bozhechkova 10). Quantitative easing is another long term method that aims to relax fiscal constraints in the market. Below is a graphical analysis depicting the human capital investment, employment, and non-employment in Canada.
During 2015, despite the downward trend of GDP growth, CPI inflation was higher than anticipated and the two factors driving the outcome are Canadian dollar depreciation relative to falling oil prices. The most measure of controlling inflation by the Canadian authorities remain in a narrow range given the persistent slow growth in the economy. Such proposal would largely impact on the exchange rate to about 0.5 to 0.7 percentage points in CPIX inflation. Expenditures grew modestly by employment outside the resource sector. Canadian authorities estimate the real GDP growth has been associated with retroactive universal child care benefits payments.
(a) Participation rate of Canadian male 15 years and above has declined since January 1976
1 (b) Participation of females in Canada has been on the rise since January 1976
2 (a) Canadian unemployment rate of females between 15 and 24 years has been sharply falling and rising since January 1976.
2 (b) Canadian unemployment rate of males between 15 and 24 years has been declining since January 1976.
Works Cited
Bozhechkova, Alexandra V. "Inflation and Monetary Policy in January 2015." SSRN Electronic Journal 6.3 (n.d.): 13-26. Print.
Cobham, David. "Monetary Analysis and Monetary Policy Frameworks: Introduction." The Manchester School 83.13 (2015): 1-4. Print.
Poloz S, Wilkins C.. "Monetary Report in January 2016." Bank of Canada Journal 12 (n.d.): pg 7-29. Print.
Poloz S, Mustafa, "Prudent Preparation: The Evolution of Unconventional Monetary Policies” Bank of Canada 9 (n.d) pg 2-7. Print.
