CH 5 Economic Policy Flashcards
What is “crowding out”?
When government borrows significantly and reduces the capital available for business investments.
What is fiscal policy?
Spending and taxation
What is the Bank’s main role?
Promote the economic and financial welfare of Canada
How can the government stimulate the economy under fiscal policy?
- Increase spending
2. Lower taxation
What are the 4 main responsibilities of the Bank of Canada?
- Promote a financial system that operates efficiently
- Design, print, and distribute Canadian bank notes
- Manage government accounts and foreign exchange reserves and debts and advise the government on what types of bond to issue
- Monetary policy
What is monetary policy?
Government policy related to money like money supply, interest rates, exchange rates, and inflation.
What happens when interest rates increase and decrease?
Increase:
- borrowing decreases
- consumption decreases
- helps to slow the economy
Decrease:
- borrowing increases
- consumption increases
- helps to spur the economy
What happens when money supply increase and decrease?
Increase:
- price decrease
- interest rate falls
- helps to spur the economy
Decrease:
- prince increase
- interest rate increases
- helps to slow the economy
3 main ways the government can influence money supply and interest rates?
- Target overnight rate
- Open market operations
- Drawdown and redeposits
What is overnight rate?
Interest rate in the overnight market which major financial institutions lend each other money in the form of one-day loans
What is bank rate?
The rate that Bank of Canada charges a chartered bank for a one-day loan.
What is basis points?
100 basis points in 1.00%
so 0.01 = 1 basis points
How does Bank of Canada’s overnight rate measure in operating band?
The overnight rate operates within an operating band that is 50 basis points (0.50%) and is set at the upper limit.
What is the midpoint target overnight rate?
Midpoint = target range
How many predetermined dates does the Bank of Canada announce per year on target rate changes? And what does this announcement tell the marketplace?
8 and tells the future direction of interest rates