Economics Questions On The Bank Of Canada

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Economics Questions 1. The overnight rate refers to the interest rate at which the major Canadian banks and financial institutions lend and borrow short-term funds among the banks themselves (The Bank of Canada, 2015a). The bank sets a specific target for that rate, and that target for the overnight rate becomes the bank 's "Key Interest Rate" (The Bank of Canada, 2015a). As soon as the bank announces that its overnight interest rate is either increased or decreased (or steady), the rate itself adjusts almost instantly (The Bank of Canada, 2015b). When the overnight rate is increased, there are two main responses that occur: first, an increase in the overnight rate results in an increase in the overall long-term interest rates in Canada (The Bank of Canada, 2015b). An increase in the long-term interest rate occurs because interest rates all tend to shift together (The Bank of Canada, 2015b). There are many different types of financial assets with different interest rates; because interest rates tend to move together, they are all affected by the change (The Bank of Canada, 2015b). The second major response from the overnight rate being raised is that more financial capital starts flowing into Canada (The Bank of Canada, 2015b). As interest rates become higher, international investors push their funds into Canada to take advantage of the higher rate of returns (The Bank of Canada, 2015b). As capital flows into Canada, the value of the Canadian dollar is increased (The Bank
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