Question

Q6. WHY ARE INTEREST RATES INVERSELY PROPORTIONAL TO THE MONEY SUPPLY, PRINTED BY THE BANK OF CANADA? WHAT ARE THE FUNCTIONS OF THE BANK OF CANADA? WHAT ARE THE TWO TYPES OF DEMAND FOR OUR MONEY? WHAT IS THE EQUILIBRIUM OF THE MONEY SUPPLY?

Answer 1

Answer 6:

The interest rates are inversely proportional to the level of money supply printed by the Bank of Canada because as money supply in the economy increases, the interest rate has to decrease to remove the excess supply of money in the money because fall in the rate of interest will increase demand for money until it becomes equal to the new money supply. In case of reduction in money supply, the rate of interest increases to reduce the demand for money to remove excess demand for money in the money market. This shows that the interest rates are inversely proportional to the money supply printed by the Bank of Canada.

The Bank of Canada is responsible for setting monetary policies, printing money and determining the Canadian's bank rate of interest.

The two main types of demand for money includes Transaction demand for money which states that demand for money is needed for carrying out day to day transactions in the economy. It depends positively on the level of income in the economy. On the other hand, Speculative demand for money depends on the rate of interest in the economy and is negatively related to interest rate in the economy.

The equilibrium amount of money supply in the economy is determined in the money market where demand for and supply of money intersects.