Question and interest rates. The Bank of

Question 1 (6 marks)Based on this article, what kind of monetary policy do you think the central bank is pursuing? In a carefully written short answer (approximately 300 words) decide whether you support (agree with) this policy action or whether you disagree. In either case, please cite specific evidence from the article to justify your position.Answer:The central bank is pursuing monetary policy involves changes in money supply and interest rates. The Bank of Canada will leave the rate unchanged until April and increase the rate in July and September. Then, they reduce the rate by 25 basis points to 1.25 percent on October. As interest rate fall, aggregate expenditure and GDP will grow. I agree with this policy action. Through the changes in interest rate, some economists expect that the economic growth in Canada will be slow in the second half of 2017. Also, the Inflation rate will decrease in October.  It probably has a stable price and expansionary real output because of the policy. The external balance is an issue as well. Due to NAFTA negotiation, a foreign sector is affected. The income of exported goods is less than the spending of imported goods. The monetary policy is able to an equilibrium balance of payment for a steady exchange rate. It controls the external value of the currency do not devaluate too much. Changing the money supply and interest rate can influence the output, employment, and the price level.  The central bank may implement a restrictive monetary policy. In result, the aggregate expenditure and price level will be changed to against the inflation. The monetary policy can combat the unemployment and inflation which bring the positive effects in Canada economic.Question 2: (4 marks)Why do you think that the North American Free Trade Agreement (NAFTA) negotiations have caused the monetary authorities at the Bank of Canada to be cautious? What are they worried about and why? Use evidence from the case, and that which you have learned in this course to write a short answer explaining your opinion. Please keep your answer to 200 words.Answer:There are more trades in Canada, America, and Mexico because of NAFTA. More business in agriculture products export to other countries. Also, the price of imported goods from America and Mexico is lower because of the free tariff.  Unknown results in NAFTA will lead to monetary tightening policy until next April. The number of export products will reduce in past few month. It will make the value of Canadian dollar lower in the Federal Reserve. It has negative effects on the economic development. The domestic economic also will be influenced. The power of consumption and investment will fall. An inflation will happen. The income of employee cannot grow as the price level rise. A long time period negotiation will be bad on household indebtedness in Canada. Consumers do not have enough money to pay the debt. There is a potential risk on higher interest rates on the balance sheet of highly indebted households. Imbalance in the export and import will add the fiscal expenditure and lead to the budget deficit. Also, the bank will worry about negative effects on the loss of trades, investment, and level of production after in NAFTA.Question 3 (4 marks)Explain what is meant by monetary tightening? Using course content, describe three ways in which the Bank of Canada might achieve their objectives using monetary tightening. Please keep your answer to 200 words.Answer:Monetary tightening is the central bank increase the official interest rate. Currency circulation is less than the required amount in the circulation in the market. The value of the money will worth more. In order to prevent the consumption increase a lot and the price level rise too fast, the central bank will pursue the monetary tightening policy. The three ways are 1) the bank will increase the interest rate.2) the money supply will decrease. 3) The demand for the loan in the bank will reduce. An increase in bank rate makes it more expensive for institutional borrowers to use the lending facilities. Reducing a few benefit from the real estate. As money supply fall, it reduces the consumption and investment, the GDP will fall as well. There will be more money in the bank for the government spending. Monetary tightening is a benefit on reducing the inflation. Question 4 (6 marks)Given the economic climate described in this article, explain what you would be doing as the finance minister, using the tools of fiscal policy, to coordinate your efforts with the Bank of Canada to achieve stated objectives. Please keep your answer to 200 words.Answer:There is a potential risk, higher interest rates on the balance sheet of highly indebted households. Also, it makes a big pressure on high debt levels and a hot housing market. Some employee’s income cannot support them to buy a house, so the power of purchasing is low. The reduction in income will cause a reduction in planned consumption and investment. Therefore, it will be an inflation gap in the society. Decreasing the government spending and increasing the tax may help this situation. The bank of Canada can reduce the loan interest to reduce the high debt level and support small enterprise development. Subsidy to the domestic factories to reduce the loss from a high price of exported goods. The central bank pursues the tight monetary policy for a period in order to combat the inflation.