Interest Rate Reduction in Canada

Question: Discuss about theInterest Rate Reduction in Canada. Answer: Summary of the Article: The bank of Canada has reduced the interest rate (Blatchford and Press, 2016). Increasing money supply in the economy due to the policy measure. The policy is affecting both supply and demand of the economy. Reduction of earnings from retirement packages. Increasing Gross Domestic Product. Economic Concepts used in the Assignment: The assignment uses economic concepts like Demand and Supply, Labour Economics, IS-LM, Gross Domestic Product of National Income. Analysis of the Article: The article states that the governor of the Bank of Canada has announced a reduction in the domestic rate of interest. This policy has been taken regarding the fact that the country is lagging behind its output potential. According to Schembri (2016), the Gross Domestic Product has of the country thus needs to reach its full potential as it will decrease the unemployment rate of the country. The policy hits the Gross Domestic Product through many channels which are critically discussed below. Demand Side: Due to the fall in interest rate common people of the country will now save less and spend more. This will increase the Aggregate Demand of the country. As stated by Case, Fair and Oster (2012), reduction in the interest rate will also make loans more attractive to the consumers. They will spend more taking loans, which will increase the aggregate demand of Canada. The increase in the aggregate demand can be depicted in a figure following the demand and supply concept. Figure 1: Shift of the demand curve. Source: As created by the author. As the figure above shows, the policy of reducing interest rate will increase the total consumption and output of the country. Supply Side: The supply side of the economy consists of the producers and their investors. According to Rios, McConnell and Brue (2013), due to the reduction in the interest rate and the increase in demand the producers will try to increase their supply in order to get a greater share of the market. They will invest more on the production as it will increase their revenue and now investing costs less due to the low interest rate. The situation can be depicted in the figure below. Figure 2: Outward movement of the supply curve. Source: As created by the author. As the figure above shows, the supply curve will shift outwards due to the sudden rise in investment on production of goods and services. According to Kriesler and Nevile (2016), the increase in the demand and a demand driven rise in the supply will increase the total output of the country. This will increase the Gross Domestic Product. The rise in investment and resulting increase in output following the reduction of interest rate can also be shown the following way: Figure 3: Rise in the G.D.P due to increasing investment. Source: As created by the author. As the figure above shows, the previous aggregate expenditure was Y= C+I+G. After the increase in investment the aggregate expenditure becomes: Y= C+I+G. Here I is greater than I. According to Young and Zilberfarb (2012), this increases the Gross Domestic Product of Canada. Labour Side: Due to the fall in interest rate, those people who have planned their retirement with a certain retirement package idea will now meet a reduction in the package. The earning from the retirement package will be lesser now. To meet this issue they will work for a few more years. This will provide the country experienced labour for few more years. It will help in increasing the output of the country. Personal Interest Regarding the Economic Decision: My friend who has taken a student loan with flexible interest rate will now have to pay a lesser amount to the bank. The total amount repayable will reduce for those who had opted for a flexible interest rate. Those who opted for fixed interest rate while taking a loan will now be worse off as they still have to pay the higher amount. Views Regarding Self Interest and Social Interest: Self interest and social interest can differ and fall in line at the same time. The society will be better off due to the rise in the Gross Domestic Product. On the other hand those who had taken loan on fixed interest rate and those who were looking for taking retirement will suffer due to the low interest rate. References: Blatchford, A. Press, T. (2016). Get used to low interest rates, says Bank of Canada governor | Toronto Star. thestar.com. Retrieved 20 November 2016, from https://www.thestar.com/business/economy/2016/09/20/get-used-to-low-interest-rates-says-bank-of-canada-governor.html Case, K. E., Fair, R. C., Oster, S. M. (2012). Principles of economics. Prentice Hall,. Kriesler, P., Nevile, J. W. (2016). IS-LM and macroeconomics after Keynes. In Post-Keynesian Essays from Down Under Volume I: Essays on Keynes, Harrod and Kalecki (pp. 69-80). Palgrave Macmillan UK. Rios, M. C., McConnell, C. R., Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill. Schembri, L. (2016). Two-Track Adjustment: The Outlook for the Canadian Economy. Young, W., Zilberfarb, B. Z. (Eds.). (2012). IS-LM and modern macroeconomics (Vol. 73). Springer Science Business Media.