Question
Read the following news reported on March 30, 2020: The Bank of Canada lowered its policy rate Friday by another half a percentage point to
Read the following news reported on March 30, 2020: The Bank of Canada lowered its policy rate Friday by another half a percentage point to 0.25 per cent, adding in a statement that the unscheduled decision brings the benchmark as low as policy makers are willing to take it for now. It also announced for the first time it plans to start buying a minimum of $5 billion a week in government securities as well as short-term debt issued by companies. a) Why did the Bank of Canada cut interest rate after the burst of Covid-19 pandemic? Please relate it to the BoCs goal of monetary policy. b) The announced large-scale asset purchase program (also known as Quantitative Easing) is used by the BoC for the first time. How is this monetary policy tool different from conventional open market operations? Why is this unconventional policy tool used at this time? How can you relate it to the BoCs monetary policy goal? c) What would happen to bond price and yield immediately after this announcement (but before the actual purchase)? Briefly explain, referring to the asset demand theory.
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