Chapter 7: Harper says Canada must do everything to fight Slump

Summary

http://www.bloomberg.com/apps/news?pid=20601082&sid=avSjOB31D7is&refer=canada


Stephen Harper said the worsening slump requires the use of everything necessary to spark growth, including possible esteps by the bank of canada to inject money into the economy. Central bank is preparing to use policies beyond interest rates moves as borrowing costs approach zero. This includes buying securities and creating money to pay for them in order to expand lending. This strategy carries the risk of faster inflation.

Connections

This chapter is about money and the canadian banking system. Banks creating money without securities or fiat money is made. According to Greshams Law, bad money forces good money out of circulation. This is partly the cause of the slump and the bad money must be renwewed into good money. The central bank's interest rates moves lower as borrowing costs approach zero. The Bank rate of canada is already low and chartered banks still dont have enough people borrowing money. By creating money, there are indivuduals who are willing to buy money and there are those who are willing to supply money. But demand for money is lower, the government has to create some money to put water on the house on fire. But the water may flood the basement of the house. The risk of faster inflation is a risk the government is willing to pay. It is possible for further economic growth if the bank is able to expand the money supply. BWhen teh bankregulates the money supply in order to influcnce the economic conditions, it is referred to as the monetary policy.

Reflection

I think this is a necessary step for the government in order for growth of the country, if not, a further slump would happen. No risk means no action and we cannot tell the future of the economy so the governemnts decision in doing this to create securities by creating money is a step on using the tools such as the monetary policy to include changes in the bank rate and open market operations.