Canadian Regulatory Policies
The Depression taught Canada how to deal with economic shocks of demand and supply. Since then Canada has utilized reviewed and updated policies to regulate the economy.The fiscal policies are geared towards keeping the goods market stable while the Monetary policies are geared towards keeping the financial markets in equilibrium through the exchange rates, interest rates and money supply. Monetary policy in Canada aims to increase output and income and simultaneously keep inflation at its low target rate. David Dodge, Governor of the Bank of Canada to the Sch
ool of Policy Studies, explained how monetary and fiscal policies in Canada work. In summary, monetary policy cannot accommodate for temporary supply shocks too well. The banks' only measures exclude such components, and as a result the interest rates response are usually minimal. Using these monetary and fiscal policies to regulate and stimulate the economy, the Central Bank and Government of Canada try to keep economic growth , full employment, inflation and overall standard of living at their optimal levels. Now the economy is at a higher output level. For supply shocks, consider price surprises from sensitive parts of the CPI. Fiscal policy uses government expenditures and taxes to stimulate the economy. A decrease in taxes allows households to have more disposable income and therefore spend more. The Fiscal policy uses tax revenue and employment insurance payouts as stabilizers of the market. According to Dodge, if the economy is at its potential and a negative demand shock occurs, it will put downward pressure on inflation(away from its target). This causes aggregate demand to increase, consequently, supply must increase to offset the increase in demand. Dodge explains a very similar scenario for policies used by Canada. To bring inflation back up the Bank of Canada lowers its overnight interest rates and through markets, interest rates and exchange rates, the economy's output increases toward potential and inflation returns to its target . When the economy slows , tax revenues decrease and payouts increase to buffer the effect on personal disposable income and reduce the size of the output shock.
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