Chapter 8: Stabilization Policy

http://www.vancouversun.com/business/Interest+rates+stay+CIBC+says/2782003/story.html

Summary:
With the Canadian economy doing well in the past six months, interest rates are expected to rise from the Bank of Canada. A reason for Canada to keep the interest rate low after July is because the United States will have a gradual approach to raising rates. Inflation is expected to slow down and government is expected to control our spending habits. The interest rates are promised to be kept at 0.25 percent until the end of June. In February, Canada’s inflation rate was at 2.1 percent when it was expected to be at 1.6 percent. The inflation rate is growing rather quickly.

Connection:
The Bank of Canada currently has a low interest rate which increases the money supply. The monetary policy is in effect right now because there is change in the money supply. The low interest rates influences consumer and business spending causing inflation. The banks are now expected to raise the interest rates to slow down the increase in the money supply. Since inflation is higher than expected, there should be low unemployment rates right now. The Phillips curve represents the negative relationship between rates of unemployment and rates of inflation. The government can also control the inflation rates of the economy by the fiscal policy. The fiscal policy changes the level of government spending and taxation to help stabilize economic conditions. With rapid growth of inflation rates, government can reduce their spending and increase the level of taxation. This would reduce the amount of spending by individuals and the growth of inflation rates would slow down.

Reflection:
The Canadian dollar overtaking the American dollar does not necessarily lead to a positive outcome. When the Canadian dollar has more value than the American dollar, it becomes more expensive to purchase things in Canada. Consumers would tend to purchase things from a cheaper provider. When this happens, the manufacturers in Canada lose consumers to the United States. The demand for Canadian companies decreases. As a result, the manufacturers in Canada have decrease in productivity and layoffs are a possibility. The Bank of Canada and the government play important roles to help maintain a stable inflation rate so that our dollar value does not raise or drop too much.

Canada’s consumers’ incomes not keeping up with debt levels

http://www.vancouversun.com/business/Canada+consumers+incomes+keeping+with+debt+levels+study+finds/2754124/story.html

Summary:
Consumers are spending more than they can afford for their lifestyle. Their incomes cannot keep up with their spending. The assets being purchased are not appreciating in value as quickly as the debt many people owe. The consumer capability index measures a consumer’s ability to spend. The factors affecting this are debt-to-income and debt-to-asset ratios, real income growth, the long-term unemployment rate, house price to income ratio, personal savings rate, and personal bankruptcy rate. More money is spent than a consumer’s income can support. For example, a mortgage debt is 147 percent of a person’s income. Consumers are still continuing to spend with an income growth and the low interest rates. The low interest encourages people to borrow and spend which is what helps bring the economy out of a recession. Increasing interest rates would put people in the position to pay back debts and build up savings.

Connection:
The article explains how consumers are spending more than they can afford because of the low interest rates and increased incomes. The low interest encourages people to borrow and spend therefore it would make spending easier for consumers. As a result, more money is going into the economy and the price would increase drastically. This would result in the demand for products to increase. As the demand continues to increase due to consumer spending, the aggregate demand for goods and services would eventually exceed the supply. When this happens, this causes a demand-pull inflation. When the demand-pull inflation occurs, the prices of consumer products will increase in the Consumer Price Index. Households are spending more and as a result, businesses experience an increase in revenue. The increase in revenue will allow business to afford increased wages which means households are earning more money than before. However, the increased wages in the circular flow of money does not make up for the debts that they owe. These excessive spending would cause a problem in the future.

Reflection:
I do not believe the current situation with the demand-pull inflation is a good thing. Consumers are taking on too much debt in order to satisfy their spending habits. In the short run, consumers may be fine with the low interest. However, in the long run, it would be difficult for them to pay off the debts due to inflation rates increasing higher than wages. In the worst case scenario, if consumers are unable to pay off their debt, it would lead to a recession. It is important for the inflation rate to be controlled so that the economy can be more stable.