Canadian economy is recorded as one of the strongest and fast growing economy in the world. In the last two decades, the economy has recorded a fall in unemployment and economic growth, but inflation persists.
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With the economy, engaging in vigorous policy and structural reforms the economy has turn out to be resilient, flexible and well integrated with worldwide markets. In the recent years the economy has be able to overcome both internal and external milestones such as a housing boom, major drought and the economic and financial crisis that had hardly hit the Canadian economy.
The country is endowed with resources and with a diverse primary sector based economy. The main exports are wool, meat, coal, iron ore, gold, alumina, transport and machinery, equipment and wheat. These exports have continued to spur the economic growth since 1788.
The gross domestic product has continuously grown with it approximating to $ 1 trillion in the year 2007. Unemployment rate on the other hand has decline from a high of approximately 11 per cent in the year 1995 to less than 5 per cent in the year 2008.
The service sector leads with an employment rate of seventy five per cent followed by the industrial sector with 21.1 per cent and finally agriculture with 3.6 per cent (Rune, 213).
The Canadian economy has also had a continued budget surplus that the government has use to service its debts. The budget surplus, between the years 2002 and 2007, averaged one and six percent on gross domestic products respectively.
As per the Economic Survey of Canada of 2007, the GDP growth rate has averaged 3 per cent per annum since 2000 and the real GDI (Gross Domestic Income) registering a growth rate of 4 per cent. The proportion of people living below the poverty line has decline up to a point where in the year 2009 none of the Canadian citizen is within the bracket of those below the poverty line.
As part of the countries reform agenda, it has removed trade barriers, liberalized its financial sector, introduced local labor laws, and spreads out its labor market among others. With no trade barriers in the transport, financial and telecommunication sectors, the economy has experienced competition in different sectors.
Canada has a desirable, well-built economy with its GDP per capita equivalent to that of four leading west European economies. Stressing on policy and structural reforms, near to the ground persistent rise in price, a housing boom in the market and growing strong relations with China forms the basis of the economic expansion that Canada has recorded over the past fifteen years.
Until the recent 2008 worldwide financial crises, the above-mentioned factors have been greatly contributing to economic growth. Consumer and industry confidence and soaring export prices for primary agricultural products and raw materials accelerated the economy to a high growth rate level in the recent years.
Shortage of rain, strong currency, and a strong import demand, raised the trade deficit, as the infrastructure holdups and a rigid labor market slowed down the growth in the number of export and stirred up inflation up to the year 2008.
During the 2008 worldwide financial crisis, the economy recorded a remarkable growth through both fiscal and monetary stimulus, buoyant export demands and investors from China together with well performing financial sector contributed to the country’s avoidance of the recession.
The Reserve Bank of Canada as one of the G20 was the initial country to constrict monetary policy right after the financial crisis through the Central bank of Canada that increased its assistance rate in October 2009.
In the year 2010, the governments plan is to increase the economic outlay, maintain the symbiotic business relations with China, enacting legislations concerning emission trade and reduction of climatic issues such as droughts and upsetting bushfires.
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Policy instruments are defined as the available options that can be utilized by the government to run economic activities. Instruments are classified as either monetary policy or fiscal policy.
Monetary policy refers to the actions pursued by the central bank of a country to regulate the amount of money supply in the economy. The actions can be either on interest rates or on exchange rates.
The main objective is to check on the rate and level of expansion of AD (aggregate demand) in the nation. Specifically it is used to control the rate of inflation and unemployment rate. Monetary policy can be either expansionary or contractionary policy.
Therefore, a target is also referred to as an objective. It is the aim of any economic policy and it can be measured in reference to an economic variable like unemployment rate, growth of Gross Domestic Product (GDP), or rate of inflation.
To achieve these targets we use policy instruments. A change in economic policy (instruments) used will led to a change on the other variable (the target). This indicates of the relationship existing among economic variables.
The main objective of Canadian government is to keep inflation as low as possible. Therefore, the country policy makers will have to adopt an inflation targeting monetary policy. Under this monetary policy, the target is to sustain inflation at a favorable range.
The inflation target is achieved through the central bank monthly modification on the interest rate target. The economy will adopt a contractionary monetary policy where the amount of money supplied in the economy is reduced making the interest rates to soar leading to low inflation rates.
When inflation rate is higher than the expected the central bank is likely to increase interest rates (Arestis 89). This is a contractionary policy since it will ensure a just economy and a low interest rate. On the other hand, in the event of low inflation rate far below the bank will respond by lowering the interest. This will increase the amount of money in circulation; hence, the inflation will be steadily increasing.
Monetary policy uses a number of tools in controlling the amount of money supplied and the interest rate to manipulate variables like joblessness, price increases, exchange rates and financial growth.
Where only the central bank is vested with the sole power of issuing currency, the bank will have the power over the amounts of money that should be in circulation. With the ability to change the amount of money supplied, it will also affect the interest rate.
It is essential for policymakers to come up with realistic announcements, and protest against interest rate targets since they are irrelevant and not essential in relation to monetary policies. When consumers and businesses consider that policymakers are devoted to keeping inflation low, they will expect prospect prices to be lower (Sexton, Fortura and. Kovacs, 134).
In addition, when an employee anticipates prices to increase in the near future, the employee will find an employment with fat wages to counter for the increase in price.
Hence, the anticipation of poor wages is indicated in wage-setting conduct between employers and employees. With low wages, there will be no demand-pull inflation and cost-push inflation since employees earn less and employers pay less respectively.
To reach the intended low inflation, policymakers should have realistic announcements. This means that private agents should consider that the announcements would indicate real future policy.
When an announcement concerning inflation objectives is made and is not understood by private firms and customers, wage setting shall foresee high inflation level implying that wages will be elevated and inflation goes up. A lofty wage will augment a consumer’s demand-pull inflation and a business’s cost-push inflation.
If policymakers suppose that private individuals and businesses expect low inflation, an expansionary monetary policy will be adopted where the extra gain per unit outweighs the extra cost of inflation per unit.
However, credible announcements are done in many ways. First is to set up an autonomous central bank with minimal inflation targets and no output objective. In this case, private individuals and firms are sure of inflation being low since it is bench marked by the autonomous institution.
This can be attained through incentives such as increase salary for the bank governor as a sign of the banks commitment to its policy targets. These means that in any policy implementation process reputation of the business plays a very important role but it must not be interplayed with dedication
Despite the fact that a central bank may possess a positive reputation based on its perfect performance in carrying out monetary policy, the bank may not have necessarily embraced any particular kind of commitment for instance aiming at a particular inflation range.
Reputation also plays an important part in establishing how well would the target markets agree to the announcement of a certain dedication by the central bank to a policy aim but reputation and dedication should not be incorporated.
In addition, in rational circumstances reputation of the policymaker concerning past policy options does not count, it is only the ideologies, public statements, professional background among others of the central bank head that matters.
In fact, many economists have argued that to do away with any pathology in relation with the inconsistencies of time during implementation of monetary policy, the chief of the central bank ought to have a bigger aversion for inflation as compared to the rest of the economy.
Hence, the reputation of the Reserve bank of Canada will be tied on institutional arrangements other than past performances when private agents are anticipating on inflation (McConnell and Stanley 103)
In a nutshell, the macroeconomic policy specifically the monetary policy embraced by the central bank of Canada in its policy and structural reforms has turned out to be fruitful.
The country has been able to combat inflation resulting to a steady economic growth. In the peak of global financial crisis the Canadian government has been able to avoid recession through its central bank firm adherence to its commitment to the monetary policy.
Arestis, Philip. An assessment of the global impact of the financial crisis. Basingstoke: Palgrave Macmillan, 2010. Print.
McConnell, Campbell, and Stanley, Brue. Economics: principles, problems, and policies 15th ed. Boston, Mass: McGraw-Hill, 2002. Print.
Rune, Stenbacka. Microeconomic policies in the new economy. Helsinki: United Nations University, World Institute for Development Economics Research, 2001. Print.
Sexton, Robert, Fortura, Peter and. Kovacs, Colin. Exploring microeconomics. 2nd Canadian ed. Toronto: Nelson Education, 2010. Print.