Economics Chapter 7 Blog

<<http://www.bloomberg.com/apps/news?pid=20601082&sid=aTbBweZdM51M&refer=canada>>

On May 29, the bank of Canada indicated that they would be raising the interest rates in the future due to the over inflation in the economy. The interest rate for an overnight loan would be 4.25%. The Canadian dollar are at its 30 years highest, the central bank said in a statement today in Ottawa, “There is an increased risk that future inflation will persist above the 2 per cent inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.”. The over inflation of Canadian dollar and the lack of U.S. demands caused workers at manufactures such as the building materials and car industry unemployed. We can see that 1 Canadian dollar can be exchanged for 93.2 cents from May 28 of 92.59 cents. We can see that the Canadian dollars are increasing by a lot, but a senior fixed income strategist at TD securities stated that, “The market is quite comfortable to see the Canadian dollar higher yet. The way they have changed their tone, we firmly think that the best move right now is July rate hike.” However, despite that inflation is pretty high already, 6 out of the 20 surveyed economist predict that it will continue to rise this year, due to the evidence of exporter’s sales are still continuing to grow. Due to the high Canadian dollars, our exports are becoming less attractive to foreign customers and US exports make up a third of Canada’s 1.1 trillion economy. Some industries start to complain about the lack of swift decision made by the government and demand the government to minimize their losses.

Relation to chapter 7

We can see that in chapter 7, we study about how to control money using different methods and one of them was controlling the interest rate through the central bank in order to guide the economy to healthy 2%-2.5% inflation. In the article above, it clearly states that due to the over inflation in the Canadian economy causing our dollars to rise rapidly almost matching the U.S. currency of 1 to 1 ratio. The central bank decided to increase interest rates in order for people to save more, and take money out of the circulation in the economy. A high currency doesn’t necessarily means that it is bad for the economy, because when your currency is high, you can exchange more for other currencies; therefore, you can buy more of the same thing with the same amount of money then before. This means that the imports would increase and more people would buy imported goods since they are cheaper. However, with a high currency, we can see that the export economy would be affected, because when foreign investors or customers want to buy things from you, they have to pay more in order to pay for the same amount of product, affecting them to buy less or maybe not even buy at all. Therefore, we need to find an effective way to keep our inflation from 2%-2.5% and find a equilibrium between export and imports or whatever is best for our economy.