Marco Economics

1.Find a recent  (May 2015- present) money and banking related article in the media (the Economist, Globe and Mail, National Post, New York Times, etc.,), and attempt to explain parts or all of it using the tools we learned in class. Highlight the sentences that you analyze, and hand in the article along with your work. Use written and graphical explanations. (approximately 3 double spaced pages; 20 marks)

1.        Canada has experienced a great economic shrink during the first two quarters of 2015. This news article published on July 24, at the time when Bank of Canada lowered the overnight rate by one quarter of a percentage point. The author talked about the reasons why Bank of Canada did so and his ideas and concerns of the reduction of the overnight rate.

        The author mentioned that there are three reasons why the Canadian economy has slowed. “Oil prices are down, the Chinese economy has slowed, and the Canadian manufacturing sector is not performing as well as has been anticipated.” First of all, Canada ranks 5th in the production of oil and 4th in the export of oil in the world. Oil is the biggest component of Canada’s GDP. As the oil price falling, Canada suffers a big loss in its economy. Second, the biggest emerging country China used to have a very high GDP growth in last 10 years but sharply slowed down the economy.  Today’s economy is globalized, the deceleration of Chinese economy will make a heavy impact on resource-based countries like Canada’s. Third, the manufacturing sector does not satisfy Canada as it expected.

        Under the pressure of negative economic condition, “the central bank decreased the overnight rate by one quarter of percentage point to 0.5 per cent”. We have learned from the class, overnight interest rate is the rate that participants borrow and lend overnight funds to each other in the money market. It is a tool of monetary policy used by the central bank to speed up or slow down the economy.  We can see from the graph below, the overnight rate is always between the bank rate (ib) and the bank rate less 50 basis point. (ier= ib- 0.50)

[pic 1]

“Last week Stephen Poloz, governor of the Bank of Canada, lowered interest rates in order to accelerate growth in the slowing Canadian economy.” By changing the overnight interest rate, the monetary policy will affect market interest rates, from short term money market instruments such as treasury bills to long term capital market instruments like 10-year government bonds. When the central bank reduces the target for the overnight rate, interest rates of these different instruments fall, firms and households would increase their demand for credit, and commercial banks increase the supply of credit at the same time.