Monetary Policy

Monetary policy 

Recently in our economics class we have been looking into how fiscal policy is used and what actions are carried out to make it work. Fiscal policy is based upon government spending and taxation, we now look at its partner Monetary policy. 

Monetary policy is concerned with how much money circulates in the economy and what that money is worth. It is controlled by the monetary authority of a country, which are those who control the money supply. Monetary policy focuses specifically on banks and federal reserves where all of our money comes from. It uses specific tools to reach these economic objectives which is infinitely the goal of price stability.

Using the tools 

Unlike our usual tools of fiscal policy, the use of taxation and government spending to regulate flow of cash in the economy, Monetary policy focuses mainly on interest rates with these operations are carried out by the Bank of Canada. A main goal by these banks is to use an "inflation control" system which is to keep inflation around 2% the mid point between their 1 -3% goal range. How the bank goes about this inflation control system is basically when demand is high it can push the limits of the economies capacity to produce. To counteract, the bank of Canada will increase interest rates to try and cool off the high rising pressure of inflation. Same way would work when there are low-growth periods in the economy the banks will decrease interest rates to stimulate the economy. These rising and dropping of interest rates can be further described in contractionary and expansionary monetary policy. 

Contractionary Monetary Policy 

This monetary policy decreases the money supply in an economy, by decreasing the money supply in an economy you also cause GDP to decrease. the decrease in money supply will lead to a decrease in consumer spending because of less money, less money to spend, a way this policy tries to help inflation rates.

This type of policy usually steps in when inflation rates are very high; when people have lots of money and prices are low. The governments goal is to then decrease this spending by decreasing the flow of money in the economy which can be done by 

1. Increasing interest rates will also increase the rates at which banks lend. When these rates are high, it is hard for people to obtain loans thus causing less spending

2. Banks have a reserve of cash for high demand withdrawals, when this reserve must increase, banks have less money to lend out. Causing less loans to be made.

Expansionary Monetary Policy 

Just how contractionary policy goes to decrease money supply, expansionary does the exact opposite and increases the money supply. A good example of this would be tax cuts, governments rarely use this policy because it can be risky causing high inflation. When there is a low-growth period they usually do this to start the circulation of money in the economy. Thus causing a shift to the right of the aggregate demand curve.

Compare and contrast Fiscal and Monetary Policy 

Now we are going to take a look at how fiscal and monetary policy differ and compare and how they work together to create price stability. 

Comparisons:

Easiest comparison they have is the fact they both are policies designed to counteract high inflation rates. They reduce the severity of recession as the economy needs to get back on its feet. Both have an big effect on demand ex. government increasing taxes and banks increasing interest rates. Side by side fiscal and monetary policies are designed so that recession does not occur. fiscal policies are set so the government can control spending without inflation occurring and monetary policy are set to control the supply of money and continue economic growth. 

Differences 

Besides that fact that fiscal policy involves government spending, and monetary policy is control of money supply there really isn't all that much difference. The only big difference about these policies is the tools they use to go about them. Monetary uses Interest rates,  reserve requirements, and open market operations where as fiscal uses taxation methods, and amount of government spending.

In my opinion 

I believe that monetary policy is an effective and efficient way of going about price stabilization. Using the tools their given, interest rates and the ability to print money I would like to see that they can keep the economy growing and not allowing another recession to occur. Thank you.

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Fiscal Policy 101

Here we will look at how the fiscal policy works, how it must be monitored, how its implementation affects different people in an economy, followed by my opinion of it.

What is the Fiscal Policy?
According to Investopedia.com the fiscal policy is the government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy.





How Does the Fiscal Policy Work?
The fiscal policy is based on the theories of British economist John Maynard Keynes (1883–1946). Also known as Keynesian economics, this theory fundamentally states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and government spending. This influence curbs inflation (generally considered to be healthy when between 2-3%), increases employment and maintains a healthy value of money. Fiscal policy is very important to the economy. For example, in 2012 many people worried that the fiscal cliff (a simultaneous increase in tax rates and cuts in government spending) was set to occur in January 2013, and would send the U.S. economy back to recession. This problem was avoided by the passing of the American Taxpayer Relief Act on January 1, 2013.





Should the Fiscal Policy be Monitored?
Firstly, you must consider for the objective of fiscal policy, which is to find a balance between changing tax rates and government spending. For example, stimulating a sluggish economy by increasing spending or decreasing taxes runs the risk of causing inflation. This is due to an increase in the amount of money in the economy, followed by an increase in consumer demand, which can result in a decrease in the value of money.


Let's say that an economy has slowed down. Unemployment levels are up, consumer spending is down and businesses are not making steady profits. The government therefore decides to fuel the economy and increase aggregate demand by decreasing taxes, which gives consumers more spending money, while increasing government spending in the form of buying services from the market (such as building roads or schools). By paying for these services, the government then creates jobs and wages that are pumped back into the economy. Meanwhile, overall unemployment levels will decline. The government is now practicing expansionary fiscal policy. Now, with more money in the economy and fewer taxes to pay, consumer demand for goods and services increases. This revives businesses and turns the cycle around from sluggish to active.

However, if there are no brakes on this process, the increase in economic productivity will cross over a fine line and lead to too much money in the market. This surplus decreases the value of money while pushing up prices (because of the increase in demand for consumer products). Hence, inflation will exceed the reasonable level. This is why, fine tuning the economy through fiscal policy alone can be a difficult means to reach economic goals. If not closely monitored, the line between a productive economy and one that is drowning in inflation can easily be lost.

The economy may need a slowdown when inflation is too strong. In this situation, the government can use the contractionary fiscal policy to increase taxes to basically take money out of the economy. Fiscal policy could also order a decrease in government spending and thus decrease the money in circulation. Certainly, the negative effects of such a policy in the long run could be a sluggish economy and high unemployment levels. In hopes of evening out the business cycles, the government may continue to use its fiscal policy to fine-tune spending and tax levels.

Who Does the Fiscal Policy Affect?
Unfortunately, the fiscal policy will not affect everyone in the same manner. Depending on the political goals of the policymakers, a tax cut could affect only the middle class, which is typically the largest economic group. In times of economic downfall and rising taxes, it is this same group that may have to pay more taxes than the upper class.

Correspondingly, when the government decides to adjust its spending, its policy may affect only a specific group of people. A decision to build a new road, for example, will give work and more income to hundreds of construction workers. On the other hand, a decision to spend money on building a new jet benefits only a small, specialized group of experts, which would not do much to increase aggregate employment levels.

What Does it all Boils Down to?
One of the most considerable obstacles facing policymakers is deciding how much the government should be involved in the economy. Undeniably, there have been numerous degrees of government interference over the years. Although, for the most part, it is accepted that a certain degree of government involvement is necessary to sustain a thriving economy, on which the economic well-being of the population is dependent on.

 In My Opinion
I believe that the fiscal policy is effective in democratic countries for the most simplistic reason being that government intervention is an essential component of a growing economy. Say for example a recession would take place, as consumption and investment decline, the government can boost its expenditures to offset them. This is because the government can discretionarily change its level of spending with the main objective being to return the economy to the desirable growth. Overall, despite its few flaws, I believe the fiscal policy works effectively in Canada.


 
 

Expansionary fiscal policy vs. contractionary fiscal policy

By: Marc Mance

 

Last week, we were not able to discuss much due to our 3 classes in the 4 day week but out of what were given through handouts, I have decided to compare expansionary fiscal policy and contractionary fiscal policy. Expansionary fiscal policy involves government attempts to increase aggregate demand and contractionary fiscal policy describes a reduction in the amount of money used by the government or a growth in the amount of money bought in, usually through taxes.

To compare the two types of fiscal policies; we see that the aggregate demand increases in the expansionary policy. According to Keynesian economics, if the economy is producing less than potential output, the government spending can be used to employ idle resources and boost the output. When there is an increase in government spending, it will lead to an increase in aggregate demand which then leads to an increase in the real GDP, resulting in a rise in prices. On the other hand, the government can adopt a contractionary policy and decrease government spending which decreases the aggregate demand and the real GDP, resulting in a decrease in prices.

Effects of expansionary fiscal policy

·         Investment

o   Investment can be affected by increasing the government expenditures to help boost the economy. This type of fiscal policy is used by the government to influence the level of aggregate demand in the economy through price stability and economic growth which promoted further investment into firms.

·         Interest rates

o   While the contractionary fiscal policy pulls the interest rate down, expansionary fiscal policy pushes them up. When output increases, the price level increases as well. As the price level rises, people demand more money to purchase goods and services. Since there is no change in the money supplied, this increased demand for money leads to an increase in the interest rates.

Effects of contractionary fiscal policy

·         Government purchasing

o   Involves a decrease in government spending to assorted agencies which then reduce their purchases which decease the aggregate production, income and the rate of inflation

·         Taxes

o   Involves an increase of the income tax rates which provides the household sector with less disposable income that can be used for consumption expenditures which then reduces aggregate production and employment and leads to further decreases in income.

Example

An economist named Abigail Noble is assisting the International Monetary Fund (IMF) in developing policy recommendations for different economies. She met with finance ministers of newly formed states of Sacramento and Salamia.

Sacramento has an inflation rate of 7% as compared to the average of 3%, unemployment rate of 2% as compared with natural unemployment rate of 4%, budget deficit of 5% and a GDP growth rate of 6% as compared to the average growth rate of 3%. Salamia has 1% inflation, 8% unemployment as compared to average of 4%, budget surplus of 4% and GDP growth rate of 1.5%.

Due to Salamia’s low inflation, high unemployment, a budget surplus and a low growth rate, statistics clearly show that it is facing recessionary pressures which make expansionary fiscal policy very appropriate for this situation. By decreasing taxes and increasing government spending, it will eliminate the budget surplus, increase growth rate, increase inflation and decrease unemployment. On the other hand, Sacramento has high inflation, low unemployment, a budget deficit and a high growth rate shows that it is facing inflationary pressures which make contractionary fiscal policy appropriate for this situation. Increasing taxes and decreasing its government spending will reduce the budget deficit, decrease growth rate, decrease inflation and increase unemployment.

Labor Trends: College Graduates

Hello everyone. Last week, we didn't discuss that many things because of the test, but one thing that caught my attention in the labor trends unit was college graduates having better jobs. Having a college degree leads to higher earnings and more career opportunities. But is it true? This is what I will be talking about in this blog post.

On average, college graduates earn more money, experience less unemployment, and have a wider variety of career options than other workers do. A college degree also makes it easier to enter many of the fastest growing, highest paying occupations. In some occupations, having a degree is the only way to get the job. As a whole, college educated workers earn more money than workers who have less education. In 2003, workers who had a bachelor's degree had median weekly earnings of $900, compared to high school graduates who earned $554 a week, which is a difference of $346 per week, or a 62% increase in median earnings. For workers who had a master's, doctoral, or professional degree, median earnings were even higher.

The chart below show four different groups of people. The light brown line shows people who have received a high school diploma or less, with their annual earnings at around $25,000-$26,000. The gray line shows people who have completed some college without a degree, with their annual earnings at around $30,000-$32,000. The dark brown line shows people who have completed college with an associate degree, with their annual earnings at around $33,000-$36,000. The black line shows people who have completed college with a bachelor's or graduate degree, with their annual earnings at around $47,000-$60,000.

As you can see, there is a huge different in annual earnings between people who have a bachelor's or graduate degree compared to people with lower degrees or none at all. A college education can be costly of course, in terms of both time and money, but in the end the reward is well worth it.

I have this chart  to show the unemployment rates for college graduates compared to other groups. Young workers are those aged 22 to 27 without a bachelor’s degree or higher have an unemployment rate between 8%-16%. All workers are those aged 16 to 65, have an unemployment rate between 5%-10%. Recent college graduates are those aged 22 to 27 with a bachelor's degree or higher have an unemployment rate between 3%-7%. College graduates are those aged 22 to 65 with a bachelors degree or higher, have an unemployment rate of 3%-4%.

From looking at these two charts, it is clear that completing college with a bachelor's degree or higher not only secures a good paying job, but lowers the chance of unemployment for that person. Now, going back to what I said at the start about if it is true that having a college degree leads to higher earnings and more career opportunities, it is in fact true. In my opinion, it is well worth it to go to college and graduate some sort of degree. College can be very costly and time consuming, but the reward is worth it.

Unemployment

Hello classmates, In recent times we have been studying the topic of the labour force and unemployment. This is what I shall be discussing today.....

The labour force consists of those who are at the age of sixteen or older that are currently employed or are looking for work. Even those who are not working but are seeking for work are included in the labour force, which I personally believe to be odd and misleading. If the labour force consisted of those who legally work at a business, paper route or mow lawns. The rates and different types of unemployments could be displayed more accurately. In my opinion those included in the labour force should only be those that are working at the time. Those who are considered out of the labour force are those who do not want a job and those who are discouraged. How can unemployment rates be shown accurately if those who are looking for work are considered in the labour force? it can't , I believe if we knew the real number of people that are not working and are abusing the system. We would not so easily hand over our hard earned cash to the government in taxes.

A Person is considered employed if they are working part or full time hours. A person who is underemployed works part time hours but could or wants to work full time hours. There are many businesses that under employ many of their workers due to no shows, labour costs and also because business owners do not want to have their hands tied behind their backs just incase an employee with many shifts decides he or she does not want to work that week. Underemployment is a very smart business tactic for the owners, but for the workers it is not so enjoyable receiving barely any hours on the schedule.

Canada has an unemployment rate of 7.2% which is not bad, but unemployment among youth has become bigger then it has ever been. This generation is much more educated then the last one, but are struggling to find jobs now more then ever. I personally believe that is due to inexperience in the workplace, high student loan debt and also the amount of people that are seeking to certain professions as a career is becoming crowded.

The labour force survey excludes too many people in my opinion to be accurately showing the general population who is working and who is not, again I believe it is so that the general public keeps quiet and keeps paying their hard earned dollars in taxes to a corrupt government.

The labour force survey excludes residents of the three territories (which are filled with tax payed reserves)
Persons living on indian reserves, inmates and full time members of the armed forces. With the armed forces it is understandable that they could be excluded from the labour force, inmates aswell, but for any other exclusions I believe it is inexcusable and it does not accurately show who is and who is not part of the labour force.

There are a few types of unemployment, which show different reasons as to why people don't have jobs.

There is frictional unemployment which includes those who are searching for jobs or are waiting for a call back from a job. You could say that these types of people are between jobs but are still making an effort to find employment.

There is structural unemployment and this is caused by change in demand for consumer goods in technology. Which could be workers who are no longer needed or are necessary in a procedure to either advancements or demands within a product.

There is Cyclical/demand-deficient which is caused by recession. Which include markets that really go downhill during recession such as the housing market.

Seasonal unemployment is due to changes in the seasons. Nobody needs a landscaping company or a lawn company during the winter months and if you do you probably don't live in Winnipeg.. Natural rate is when the economy is working at its full rate and there is just no room for you, sorry. Please enjoy this video.

https://www.youtube.com/watch?v=If-3zgM3kXc

What Caused Changes in the Canadian CPI over time?

We learnt in Economics that the Consumer Price Index (CPI) is the measure used for calculating inflation in an economy. Inflation is simply a persistent increase in a country's overall price level. We also learnt that the main causes of inflation are the cost-push, where there is a large increase in the price of inelastic goods, and so no substitutes are available; the demand-pull, when the demand for a good or service is greater than the supply; and finally an increase in the money supply, which decreases the purchasing power of the currency, hence leading to an increase in price. Today, I would like to discuss what were some of the major catalysts of change for the Canadian CPI in past years.

First of all, you should know that the Bank of Canada plays an important role in the Consumer Price Index. One of its goals are to maintain a low, stable and predictable inflation, in order to have a safe and secure currency, and to accomplish this, it strives to keep the inflation rate between 1% and 3%. Since the bank was initiated, the average inflation rate has been 3.13%. One advantage the bank has in achieving this goal is the ability to set the interest rate for money borrowed. Another is the power to ask Statistics Canada to periodically adjust the way the CPI is calculated.Since the 1980s, keeping inflation low has been the central bank's main priority.

 The Bank Of Canada played an important role in financing Canada's war effort during World War II by printing money and buying the government's debt. After the war, the bank's role was expanded to encourage economic growth in Canada. An Act of Parliament in September 1944 established the subsidiary Business Development Bank of Canada (BDC) to stimulate investment in Canadian businesses. Prime Minister John Diefenbaker established the central bank monetary policy, which was directed towards increasing the money supply to cause low interest rates, and have full employment. When inflation began to rise in the early 1960s, the governor of the Bank James Coyne ordered a reduction in the money supply. So here we see an example of how increased money supply in Canada led to an increase in prices, and therefore an increase in CPI.

Increased inflation 1960s

 The time between the end of the Second World War and the early 1970s was quite prosperous for Canada, as compared to Some of the European countries. We came out of the war with a fairly strong economy. Moreover, there were sizable and sustained gains in productivity through the 1950s and 1960s. These reflected the revolution in agriculture and the innovation and industrialization  and changes in technology that occurred during and after the war.
All this led to a rise in Canadian standards of living instead of the post-war depression that many had feared. Even though the agriculture industry saw the departure of a lot of its workers, the overall unemployment rate remained low. So you could see in the table, that the inflation rates were quite low through the 50s and the 60s prior to '64.

However, toward the end of the 20th century, inflation rates rose at an alarming rate, a phenomenon which was dubbed, "The Great Inflation", which lasted from about 1965 to 1984. Some reasons for the high inflation rates from the 60s to the early 80s, according to the economists include large and rising fiscal deficits (due to widespread acceptance of the Keynesian theory, and the idea of coordinating monetary and fiscal policy), a slowdown in productivity growth; and a decline in the prices of primary commodities.

On the other hand, a recession will lead to the decrease in the inflation rate, because people will be spending less and saving more.There will be more supply and less demand, and as a result, prices will drop. This is a reversal of the demand-pull. This situation creates a deflation instead of an inflation. For instance, one can see in the CPI chart that during the Great Depression from 1929 to 1939, the inflation rates were very low. There was a similar occurrence during the 2009 recession, although on a much smaller scale.
Great Depression chart 

To conclude: inflation is a given; no successful economy can be completely without it.It happens on a regular basis, and it often differs from year to year.While it has its negative aspects, mainly the increased prices hence making it harder to come by needs and wants, and decreased purchasing power, it has some positives in that it helps to boost the economy, for example, one that is stuck in a recession. All in all, I believe that inflation needn't be a bad thing necessarily; it only needs to be carefully managed. 
Thank you.

https://www.youtube.com/watch?v=3vwPgX24g28

Inflation

Inflation

Last week in class , we went over a activity that involved us bidding on several different products that were being showcased by the lovely Mrs. Teetaert. As the price of the items increased, less people were bidding on them and towards the end it became a competition of who wanted the item end. Afterwards we learned that the activity showed us how inflation really works.

What is Inflation?

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money, and a loss of real value in the medium of exchange and unit of account within the economy. To simply put it;  inflation is an upward movement in the average level of prices. It is also believed by economists that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. When we look back at our game in the second round, we found out what the items were and figured out the value. When we were introduced to more disposable income in the second round, we watched most students bid high amounts of money simply because they had the cash to do so.

Understanding Inflation

The following is a video defining deflation and relating the term with purchasing power.

Relationship between Inflation and Money

Inflation and its increase of prices will always be linked to money. Inflation is a high level of money pursuing a low level of goods/services. An example of how this works , picture a world that has just two commodities: Apples picked from apple trees, and paper money printed by the government. In a year where there is a drought and apples are limited, we'd expect to see the price of apples rise, as there will be quite a few dollars chasing very few oranges. On the other hand, if there was a high level of apples one year, we'd expect to see the price of apple fall, as apple sellers will need to reduce their prices in order to clear their inventory. These scenarios are inflation and deflation, respectively, though in the real world inflation and deflation are changes in the average price of all goods and services, not just one.

Relationship between Inflation and Money supply

Inflation as well as deflation can be caused by altering the level of money that is in the system. If the government prints large amounts of money, dollars become abundant relative to apples, in the last example. Therefore inflation is caused by the amount of money rising relative to the amount of goods and services. Deflation is caused by amount of money falling relative to goods and services.

In the Real World

In an article posted in January reading "Inflation rate rises to 1.5 in January" by the Canadian press talked about how the inflation rate in Canada raised from the previous month from Decembers 1.2 per cent. The cause of the increase was due to increased shelter, transportation, and food costs. Statistics Canada said seven of the eight major components of the consumer price index were up from a year ago. Higher electricity and insurance costs pushed up shelter costs. This shows how there was an overall demand increase in the growing economy. Demand for goods exceeds the capacity for manufactures to build them and prices rose, which led to inflation rising. While high levels of inflation seems dangerous, deflation in my opinion is even more dangerous. A high level of deflation will cause people to get laid off, spend less, prices become lower, which in my opinion will cause people to wait longer to see if prices can lower further, but consumers have less money to spend so they still buy less. Although inflation raises prices over time, I do believe that some inflation is a good thing.