Chapter 7 Blog

http://www.cbc.ca/money/story/2008/03/04/bankofcanada.html

Bank of Canada opts for aggressive interest rate cut

The Bank of Canada reduced their lending rate by half a percentage to 3.5% in order to prevent the weakening U.S. economy from greatly affecting Canada. Analysts have thought the rates would decrease from anywhere between 0.25% to 0.5%, and that the 0.25% would be more likely seeing as the domestic demand in the Canadian economy was still strong, but the central bank said Canada’s economy has shown signs of weakening within the last two months. Also, the bank said the recession in the U.S. residential housing market is damaging the other parts of the U.S. economy and as a result, increasing the risks in damaging Canada’s economy.

In chapter 7, we learn about the creation of currency and the function of the Bank of Canada. As seen in this news article, the Bank of Canada determines actions in order to minimize the effects of dramatic changes that have a chance of affecting Canada’s economy such as the recession that the United States are experiencing. By reducing the lending rate by half a percentage, it will increase the amount of money that people will have allowing them to keep the aggregate demand stable and therefore the aggregate supply within Canada will remain the same.

I think that the Bank of Canada has made a good decision in reducing the lending rates by half a percentage. Canada does almost all their international trading with the United States, which currently is in a recession, will greatly hinder the Canadian economy in the end. By reducing the rate, individuals will have to pay back less to banks for the money they borrow which will slightly increase the aggregate demand compared to before the drop. I would have to say anything that would help maintain demand is a good idea during these times of economic hardships. Although the decrease in rate will not completely stop the effects of the American slump, it will act as a slight buffer to reduce the damages done.