CH.5- Economic Policy

Question 1

Economic theories

Answer 1

• Rational expectations theory
• Keynesian Theory
• Monetarist theory
• Supply side economics

Question 2

rational Expectations theory

Answer 2

-firms/workers rational thinkers
-evaluate all consequence of gov. policy
neutralize intended impact of policy

Question 3

Keynesian Theory

Answer 3

-Direct government intervention top achieve growth and stability

Question 4

Monetarist Theory

Answer 4

• Economy inherently stable, if left alone, will automatically move to stable path of growth
• Opposite Keynesian Theory

Question 5

Supply side economics

Answer 5

-market should be left on it’s own and government intervention should be minimal

Question 6

Fiscal policy

Answer 6

government spending and taxation powers to pursue economic goals like full employment, sustained long term growth

• spending more, taxing less when economy weak
• Federal adn prov. gov responsible for cdn fiscal policy

Question 7

Federal Government

Answer 7

employment insurance, defense, old age security, native affairs

Question 8

Provincial Government

Answer 8

Health, education, welfare

Question 9

Budget Surplus

Answer 9

revenue more than spending

Question 10

Budget Deficit

Answer 10

Spending higher than revenue

Question 11

National Debt

Answer 11

sum of past deficits - surpluses

-accumulation of total government spending over time

Question 12

How fiscal policy affects economy

Answer 12

• Spending: gov can purchase goods/services themselves or can trf money to citizens to spend themselves (i.e social security cheques
• Taxes: raising tax rates reduces disposable income of consumers, dampens spending

Question 13

Main types of taxes

Answer 13

• direct taxes
• sales taxes
• payroll taxes
• capital taxes
• property taxes

Question 14

Debt to GDP ratio

Answer 14

measures the debt relative to government ability and taxpayers to finance it

Question 15

role of bank of Canada

Answer 15

• Regulte credit and currency in best interests of economy
• control and protect external value of national monetary unit
• mitigate fluctuations in general level of production, trade, prices, employment
• promote economic and financial welfare and dominion

Question 16

Functions of bank of Canada

Answer 16

• Fiscal agent: administers government deposit accounts and funds
• Financial advisor to the government: advised government on the timing of new federal securities issues (price, yield, etc) to make more marketable
• Debt management: acts as federal governments fiscal agents in its activities in debt management
• monetary policy: improves performance of economy by regulating growth in money supply and credit

Question 17

Categories of debt

Answer 17

Marketable: treasury bills, marketable bonds

Non marketable- Canada savings bonds, Canada premium bonds

Question 18

How monetary policy implemented

Answer 18

carried out primarily through changes in target overnight rate

Question 19

Overnight rate

Answer 19

interest rate set out in the overnight market, where major cdn financial institutions lend each other money on overnight basis

Question 20

Bank rate

Answer 20

Minimum rate bank of Canada will lend money on short term basis to chartered banks and other members of Canadian payments association (CPA)

Question 21

2 MAIN market operations to conduct monetary policy

Answer 21

• Special purchase and resale agreements (SPRA’s): used by bank of Canada to relieve undesired upward pressure on overnight rate
• if trading above target- bank offer to lend at upper limit of operating band
• Sale and repurchase agreements (SRA’s): offset undesired downward pressure on overnight financing cost
• trading below target- bank offers to borrow at lower limit

Question 22

Large value transfer systems (LVTS)

Answer 22

• allows participating financial institutions to conduct large transactions with each other through electronic wire system
• financial inst. in LVTS send payments to each other back and forth, at end of day all transactions added up
• helps ensure overnight rate stays withing 50 basis pts range

Question 23

Drawdown

Answer 23

trf of deposits to bank from chartered banks, draining supply of available cash balances from banking system

Redeposit: trf of funds from bank to chartered banks, increases deposits and reserves and availability of funds, puts downward pressure on interest