Chapter 8 - Stabilization Policy

http://www.cbc.ca/money/story/2010/04/23/inflation-rate.html

Summary:

A recent article talks about the issue of inflation in Canada. The annual inflation of consumer prices increased by 1.4% from March/09 to March/10. There is a small decline of inflation from February, which was 1.6%. Also, gasoline prices have continued to increase for the fifth straight month, increasing 17.2% this March from the previous year. On average, energy prices increased 5.8%. In general, prices of food, cars, and communication devices increased, but on the other hand, mortgage interests, energy, and clothing decreased. Canada’s economy has been growing faster than economists predicted, leading to an The Bank of Canada's decision to increase interest rates to control the inflation.

Connection:

The connection of the article to our text is inflation and the monetary policy. The Bank of Canada increases the interest rates to control inflation. Stabilizing the economy through the use of adjusting interest rates is an example of the monetary policy. The Bank of Canada’s decision to increase interest rates, as part of the monetary policy, shows that inflation is becoming an issue and needs to be controlled. Interest rates also mean the “cost of money”, so when interests rates are high, the “price of money” is also higher. The law of supply and demand also works in this case. The increase in “price” will result in a decrease in demand. When demand goes down, inflation will also go down.

Reflection:

From this inflation that we are seeing, Canada’s economy is doing fine and we are definitely not still wrapped up in the recession. I find the issue of unemployment and inflation very interesting because they are both equally bad economic issues and the government will solve the issue that is occurring right now. It is a cycle. When we are in a good economic time, the government will use the stabilization policy to control the inflation. In this case, we are in a time of inflation, and the government is increasing interest rates as part of the monetary policy.

Chapter 5 - Economic Indicators

http://www.newswire.ca/en/releases/archive/April2010/01/c7166.html

Summary:

A recent article I found talks about the financial worries that many Canadians are having about the near future of the economy. 65% of Canadians are worried about their finances. Of that, 27% worry about paying off their debt, 18% about retirement, and 22% about losing their job. On the other hand, 44% of Canadians actually believe their financial situation will improve in the next year of so. Craig Wright, the senior vice-president of RBC forecasts a real GDP growth of 3.1% this year because of “solid consumer spending, historically low interest rates, and improved credit markets,” so the economy is recovering very well.

Connection:

The article, like chapter 5 in our text, talks about the two things that are important to all Canadians – unemployment, and inflation. Like I said in the above, about one fifth of Canadians are worried about losing their jobs because of the future increase of interest rates and the strengthening of the Canadian dollar. This is in fact a cause and effect. Because the Canadian dollar is so strong, it will cause inflation, and the government raises the interest rate to control this inflation. One thing I find interesting in the article is the use of the term, “real GDP growth.” This is because GDP growth is not always correct due to inflation. For “real” GDP growth to happen, this growth must be greater than the increase of inflation.

Reflection:

Although I was not surveyed in the RBC Canadian Consumer Outlook Index, I would fall under the 44% of Canadians that believe their financial situation will improve in the next year. The interest rate hike will not affect me because my family is not paying a mortgage right now. In addition, I believe the strengthening of the Canadian dollar will benefit me instead because it is a great investment opportunity. Also, none of my family members are worried about losing their jobs in the near future. My father is self-employed, and my mother has a very stable job working at the bank. All in all, I sleep very well at night because I do not have to worry about my finances.