Homework Question on Inflationary Gap
- Use the internet to find a brief article that connects recent Canadian monetary policy to how the Bank of Canada can eliminate an inflationary gap with monetary policy.
- Cut and paste the article into your assignment (cite the source) and be sure to explain how the article relates to how bank of Canada can eliminate an inflationary gap using a monetary policy.
- Please don’t forget to copy and paste the article and provide the link that leads to the article itself.
Homework Answer on Inflationary Gap
King’s (2013) assessment found the following:
The Bank of Canada Act mandates a goal of 2 per cent inflation, the mid-point of the 1-to-3-per-cent range the bank operates in for total CPI. Typically, the bank aims to return inflation to the 2-per-cent target over a period of six to eight quarters; in the case where flexibility is required, such as the current weak global economic environment, the bank prefers to focus on a medium-term horizon of either three to five years or five to seven years, depending on which bank official is proffering the definition of medium term (King p. 1).
Inflation control is one of the key components of Canada’s monetary policy framework. The bank of Canada is committed to maintain a low and relatively stable inflation by achieving the 2 percent inflation target. When inflation is low, stable and predictable, Canadians can spend and invest with a lot of confidence. This creates jobs and increases productivity. It also improves the standard of living. Eventually, the banks will benefit from increased transactions and a high velocity in movement of currency.
The governing policy of the bank of Canada is responsible for the day-to-day conduct of the monetary policy. It ensures a favorable monetary policy by influencing short-term interest rates (King, 2013). The bank decides on the appropriate setting of the policy interest rate. The decision is usually guided by the inflation control target. It raises its policy interest rate if inflation is above target. This encourages financial institutions to increase interest rates on their loans and mortgages.