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Chapter 15 Monetary Policy

Xingfei Liu, Ryerson University

Interest Rates and
Monetary Policy
15
LEARNING OBJECTIVES
LO15.1 Discuss how the equilibrium interest rate is determined in the market for money.
LO15.2 List and explain the main functions of the Bank of Canada.
LO15.3 List and explain the goals and tools of monetary policy.
LO15.4 Describe the overnight lending rate and how the Bank of Canada directly influences it.
LO15.5 Identify the mechanisms by which monetary policy affects GDP and the price level.
LO15.6 Explain the effectiveness of monetary policy and its shortcomings.
LO15.7 Describe the effects of the international economy on the operation of monetary policy. 2

15.1

The Market for Money and 
 the Determination of Interest Rates

3

KEY GRAPH - The Demand for Money, the Supply of
Money, and the Equilibrium Interest Rate

FIGURE 15-1

(a)
Transactions
demand for money, Dt

(c)
Total
demand for money, Dm and supply

(b)
Asset
demand for money, Da

Rate of interest, i percent

10
7.5

Sm

5

+

2.5

=
5

0

Dt
50

100

150

Da
200

Amount of money demanded (billions of dollars)

50

100

150

200

Amount of money demanded (billions of dollars)

Dm
50

100

150

200

250

300

Amount of money demanded and supplied
(billions
of dollars)

4

15.1

The Market for Money and 
 the Determination of Interest Rates

The Equilibrium Interest Rate Interest rate The price paid for the use of money

Equilibrium interest rate Demand for money combined with supply of money determine the equilibrium rate

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