Question

In some countries there is a concern that the government will run large budget deficits and force the country’s central bank to “monetize the deficit” by purchasing government bonds and providing money to the government. The resulting increase in the money supply will then lead to high rates of inflation. Briefly explain why this is not a concern in Canada. (All information I have)

Answer 1

monetize the deficit refers to the purchase of government bonds by the central bank to finance the spending needs of the government. when this happens, the central bank creates fresh money to purchase these bonds in the open market, which leads to an increase in the total money supply. it can lead to higher prices in the economy, which the central bank can counter by selling the bonds that it owns out in the open market. Such bond sales help in sucking excess money out of the economy, thus helping in the control of rising prices.

this is not a concern in Canada because,

1. The government is emphasizing trade diversification, export promotion, and support for small businesses and domestic industries affected by protectionism.

2. has also maintained an expansionary fiscal policy, and business investment has grown. Gradual monetary tightening by the central bank, however, has kept inflation contained.