Chapter 7 - Money and the Canada Banking System

http://www.cbc.ca/canada/story/2009/03/01/bank-rate.html

Summary:

This article is about Bank of Canada’s cuts in their lending rate to charted banks. This is the seventh time Canada’s central bank has reduced their rate since last February. Now the short term lending rate is a barely noticeable 0.5%. In order to free up credit the bank has also inserted $40 billion in cash into the economy through assets swaps. Even with this and the low interest rates the economy persists to decline. Usually the charter banks reduce their prime rate when the Bank of Canada reduces theirs, however this is not happening. One of the reasons is the global credit crunch. Canadian banks are avoding risky loans during this recession thus prime rates are not lowering even when the bank rate is.

Connection:

The connection between this article and the textbook is bank rates. These rates are the amount of interest the Bank of Canada charges chartered banks that borrow money from them. This usually affects the prime lending rates which is the rate chartered banks charges its creditworthy customers. When the bank rates decrease, the prime rates should also decrease. However, this is not happening right now in Canada. The Bank of Canada has lowered their interest rate to a mere 0.5%. A decline in prime rates should be happening but it is not. Chartered banks are still worried about lending money to each other, firms and consumers in a time like this. Canada’s central bank is trying to lower the interest rates hoping the chartered banks will do the same to get consumers to spend again. When the interest rates are lower customers are more willing to borrow money and spend it. Their plan will not work that effectively for Chartered banks are not willing to decrease thier prime rates.

Reflection:

The Bank of Canada is trying to stimulate the economy by reducing their interest rates for chartered banks. In the past when these rates decline the prime rates usually follow. However, this is not what we are seeing. The chartered banks are reluctent to lend out thier money or reduce interest rate for they are worried and afraid. Even though, Canada's central is bank is trying to get people spending again by lowering their interest rate. Their plan will not work since the interest rates are still high. Consumers will just keep saving their money. Also the lowering the bank rates will decrease demand-deficient unemployment. This means if interest rates are lower, people will spend and demand more and manufacturers will need to hire more employees to produce goods. All of this can't happen because the banks are afraid. How can economic spending increase when chartered banks are reluctent to lower interest rate to help consumers to spend again ?

Chapter 6 - Determination of National Income

http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20090227/shrinking_useconomy_090227/20090227/http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20090227/shrinking_useconomy_090227/20090227/

Summary :
At the end of 2008, United State’s GDP contracted at 6.2%. This is the fastest pace the economy decreased in 26 years. A majority of this downgrade is due to consumer spending, which makes up around two-thirds of economic activity in the United States. People stopped shopping for cars, furniture, appliances, clothes and other goods. Due to this the businesses also reduced in spending and inventories. Economists predict that consumers and businesses will continue to cut down on spending. This contributed to the rocky start to America’s economy this year. Vanishing jobs, sinking house market and investments also contributed to consumer’s cut back. Companies are slashing payrolls and production for lack of consumer spending. Right now, President Obama is planning to use a $787 billion recovery package to jump start America’s economy.

Connection:
The connection between this article and the text book is the change in GDP due to household savings and investment. In the United States, households are saving their money and reluctant to invest due to the dwindling stock market. When households start saving their money, less cash flows into the business sector. In reaction, businesses lessen production of goods and starts forwarding less money to households in form of wages, interest and rent. This is what the US companies are doing; they are reducing their spending, laying off workers and slashing payrolls. All of this reduces the flow of money in the circular flow resulting in a lower GDP. In this case United State’s GDP contracted 6.2% mostly caused by the lack of consumer spending and increase household savings.

Reflection:
The United States is in a recession that is almost as bad as the 1980’s deep recession. However, people are still not spending money instead they are saving which will not help the economy. Many people are keeping their money for they are afraid they will loose their jobs. If consumers don’t purchase or invest, the money will not flow into the business sector. Which results in the lay offs and reduction in pay rolls by businesses. Even though President Barack Obama is using a recovery package to stimulate the economy, it won’t be enough. People will just save the extra money they have and the recession will just worsen. Therefore, I think that people should start using their money to stimulate the economy. However, the question is how will economists convince people that spending will actually help the economy?