CH 5 Economic Policy Flashcards

1
Q

What is “crowding out”?

A

When government borrows significantly and reduces the capital available for business investments.

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2
Q

What is fiscal policy?

A

Spending and taxation

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3
Q

What is the Bank’s main role?

A

Promote the economic and financial welfare of Canada

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4
Q

How can the government stimulate the economy under fiscal policy?

A
  1. Increase spending

2. Lower taxation

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5
Q

What are the 4 main responsibilities of the Bank of Canada?

A
  1. Promote a financial system that operates efficiently
  2. Design, print, and distribute Canadian bank notes
  3. Manage government accounts and foreign exchange reserves and debts and advise the government on what types of bond to issue
  4. Monetary policy
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6
Q

What is monetary policy?

A

Government policy related to money like money supply, interest rates, exchange rates, and inflation.

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7
Q

What happens when interest rates increase and decrease?

A

Increase:

  • borrowing decreases
  • consumption decreases
  • helps to slow the economy

Decrease:

  • borrowing increases
  • consumption increases
  • helps to spur the economy
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8
Q

What happens when money supply increase and decrease?

A

Increase:

  • price decrease
  • interest rate falls
  • helps to spur the economy

Decrease:

  • prince increase
  • interest rate increases
  • helps to slow the economy
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9
Q

3 main ways the government can influence money supply and interest rates?

A
  1. Target overnight rate
  2. Open market operations
  3. Drawdown and redeposits
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10
Q

What is overnight rate?

A

Interest rate in the overnight market which major financial institutions lend each other money in the form of one-day loans

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11
Q

What is bank rate?

A

The rate that Bank of Canada charges a chartered bank for a one-day loan.

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12
Q

What is basis points?

A

100 basis points in 1.00%

so 0.01 = 1 basis points

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13
Q

How does Bank of Canada’s overnight rate measure in operating band?

A

The overnight rate operates within an operating band that is 50 basis points (0.50%) and is set at the upper limit.

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14
Q

What is the midpoint target overnight rate?

A

Midpoint = target range

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15
Q

How many predetermined dates does the Bank of Canada announce per year on target rate changes? And what does this announcement tell the marketplace?

A

8 and tells the future direction of interest rates

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16
Q

What are the two primary open market operations that the government uses to influence interest rates?

A
  1. Special purchase and resale agreements (SPRAs)

2. Sale and repurchase agreements (SRAs)

17
Q

What is the purpose of “special purchase and resale agreements (SPRAs)”?

A

Special purchase and resale agreements (SPRAs) is one of the two primary open market operations used to lower interest rates.

18
Q

What is the purpose of “sale and repurchase agreements (SRAs)”?

A

Sale and repurchase agreements (SRAs) is one of the two primary open market operations used to increase interest rates.

19
Q

What is a “drawdown”?

A

When Bank of Canada wants to decrease money supply it draws down on its balances at the chartered banks leaving them with less money to lend.

Drawdown = decrease money supply = higher interest rates

20
Q

What is a “redeposit”?

A

When Bank of Canada wants to increase money supply it redeposits money to its accounts at the chartered banks leaving banks with more money to lend.

Redeposit = increase money supply = lower interest rate

21
Q

The 6 challenges of government policy.

A
  1. Timing lags
    Takes 18 months to determine issue, decide on action to take, implement, and see outcome
  2. Political considerations
    Political business cycles can impact decisions
  3. Future expectations
    Can cause policies to fail
  4. Coordination across all levels of government
    Federal government policies are implemented nationally but sometimes only selected provinces may need the policy
  5. High federal debt
    Can limit government spending
  6. Impact of international economies
    Trading partners can impact Canada’s economy
22
Q

Advantages of monetary policy? (3)

A
  1. More immediate effect (interest rate, inflation, etc)
  2. Initiative can be easily reversed
  3. Not as politically charged as spending and taxation
23
Q

Disadvantages of monetary policy? (3)

A
  1. Difficult to target specific region with federal decisions
  2. Consumers may not spend if confidence is low
  3. When interest rates are low, a rate cut may not have impact
24
Q

Advantages of fiscal policy? (3)

A
  1. Can target specific regions
  2. Tax cuts and government spending are favoured
  3. Easier for consumers to understand (impacts more directly and see day-to-day)
25
Q

Disadvantages of fiscal policy? (3)

A
  1. Tax increase and spending cuts are not favoured
  2. Difficult to reverse decisions once started (ie. cannot build a bridge halfway)
  3. Higher government spending can result in increased debt and therefore increased costs to service the debts