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

Answer 1

Inflation rate in Canada has been 1.9% as of the month of August, 2019. This is well below the higher limit of 1% to 3% inflation rate target set by the bank of Canada (BoC) . It means that if money supply increases and it pushes the AD to the right while increasing the inflation, then also it will be around 3% and under the control of the initiatives taken up by the bank of Canada. Hence, deficit financing and resulting increase in the money supply, will help AD to shift to the right and increase the GDP that is growing at a rate of 3%. The growth rate will further increase with new jobs being created and it is good for the economy of Canada. Even though, inflation increases to the level of 3%. Hence, rise in price level or inflation, is not a concern in Canada.