a.the central bank can defend the long term external value of our currency only

Question

a.the central bank can defend the long term external value of our currency only by defending its internal value.

i. how would the central bank defend its internal value?

ii. why would this defend its external value?

b.ofcourse if Ottawa needed less cash it would undoubtedly ease the strain on the provinces and corporate sector.

i.what does Ottawa needing cash mean?

ii.what is meant by the strain on the provines and corporate sector?

c.why has the Governor of the bank of Canada argued for a stable Canadian dollar and zero inflation? arent these inconsistent goal? explain either why these goals are consistent or why they are inconsistent?

Explanation / Answer

The central bank can defend the internal value by tight monetary policy during inflation. Usually that is the case. (But a situation might arise where value rises during depression. To counter it expansionary monetary policy can be used)

2 This will defend it's value by limiting supply of Canadian dollar in foreign exchange market relative to its demand and thus save it from depreciation. In case of rising value of Canadian dollar expansionary monetary policy will increase supply of Canadian dollars relative to demand. This will led to desired devaluation.

Ottawa needing cash means federal govt of Canada will need cash to increase expenditure or to provide the services etc.

2 if Ottawa needs more cash the interest rates rise which result in more cost of borrowing for provinces and corporate sector. This places strain on them and leds to crowding out effect

According to purchasing power parity theory the exchange rate is determined by relative prices in countries. When inflation is zero in canada it means exchange rate will remain stable in canada given the prices in other countries. So it leds to stable Canadian dollar. As shown in the previous sentences the two goals are consistent rather than being inconsistent

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.