Macroeconomy of Canada Equilibrium of Demand and Supply

Question: Discuss about theMacroeconomy of Canada for Equilibrium of Demand and Supply. Answer: Summary List: Low-interest rate announced by Stephen Poloz, the governor of the Bank of Canada (Blatchford Press, 2016). Steady decline in growth of Canadian economy. Canadas economy has the potential to rise to 1.5 percent with proper management. Increasing retirement age. Low investment in businesses. Summation of Economic Concepts: The report incorporates economic concepts like domestic production in National Income Accounting, interest and investments in IS-LM, employment in Labour Economics, and Theory of Demand and Supply. Analysis: According to Stephen Poloz, the governor of the Bank of Canada, the government officials of Canada have opted for a low interest rate in the country. This is a follow up of low investment rate in the country for past few years. According to Mankiw (2014), the low interest rate will discourage people from saving. They will opt for spending the money increasing the aggregate demand. A low interest rate also enables people to borrow money from the financial institutions. This will ensure more cash in the hand of the citizen. This will help them in demanding more goods. The rise in aggregate demand will lure the producers in investing in the production of goods and services. As stated by Nixon (2014), this will increase Canadas overall expenditure and increase the Gross Domestic Product in return. There is another way the low interest rate is going to affect the economy. Those who were thinking of taking retirement early and live off the savings and pension will now get the lesser amount in hand. To avoid future problems, this working section will opt for few more working years. This will be better for the economy than creating a new workforce with less experience. All these will hit the economy of Canada as planned by increasing the investment in the production process of the economy. The result can be shown in a diagram as given below: Figure 1: Change in G.D.P due to increasing investment. Source: As created by the author. According to Rios, McConnell and Brue (2013), all the economic activities due to the low interest rate will increase the investment in the economy and push the aggregate expenditure curve upward. This will give a new equilibrium Gross Domestic Product say B, which is greater than the previous equilibrium A, as shown in the figure above. The economic situation of the country is in an emergency situation due to the low productivity level. The projected result of this low investment rate is an increase of 1.5 increase in the economy. According to the governor, this is not very inspiring for the economic agents of the country, but there are very little options which can affect the economy positively. This makes the 1.5 percent increase a lucrative one for the officials. The policy will increase the overall demand in the economy as people will have more money in hand and will want to spend it. The situation can be explained through the diagram as given below: Figure 2: Change in demand due to the policy. Source: As created by the author. In the figure above, the increase in spendable money increases the demand and pushes the demand curve to shift outward. As stated by Marshall (2013), this will increase the Gross Domestic Product of the country from C to V. This concept of demand and supply was considered while setting up the new low interest rate. Personal Interest: This decision has affected the students who have taken a loan of the flexible interest rate. One of our classmates has taken a student loan and now he is facing a lower amount repayable. This is good for the student as he will be better off. On the other hand, there is another student in the same batch who has taken a student loan on fixed interest rate. He will be worse off as in reality he has to pay more than the other student. Tension Between Self-Interest and Social Interest: As stated by Ehrenberg and Smith (2016), for this new policy, the workers who have planned their retirement will have to extend their working age to meet their planned pension package. The low interest rate will decrease the workers total interest return on their savings. This will hurt their self-interest. On the other hand, the society will be better off due to the increase in the Gross Domestic Product. Here lies the tension between self-interest and social interest. 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 Ehrenberg, R. G., Smith, R. S. (2016). Modern labor economics: Theory and public policy. Routledge. Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning. Marshall, A. (2013). Summary of the General Theory of Equilibrium of Demand and Supply. In Principles of Economics (pp. 411-417). Palgrave Macmillan UK. Nixon, R. (2014). The Keynesian Model II: The IS-LM Model. Rios, M. C., McConnell, C. R., Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.