CH.5- Economic Policy Flashcards
Economic theories
- Rational expectations theory
- Keynesian Theory
- Monetarist theory
- Supply side economics
rational Expectations theory
-firms/workers rational thinkers
-evaluate all consequence of gov. policy
neutralize intended impact of policy
Keynesian Theory
-Direct government intervention top achieve growth and stability
Monetarist Theory
- Economy inherently stable, if left alone, will automatically move to stable path of growth
- Opposite Keynesian Theory
Supply side economics
-market should be left on it’s own and government intervention should be minimal
Fiscal policy
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
Federal Government
employment insurance, defense, old age security, native affairs
Provincial Government
Health, education, welfare
Budget Surplus
revenue more than spending
Budget Deficit
Spending higher than revenue
National Debt
sum of past deficits - surpluses
-accumulation of total government spending over time
How fiscal policy affects economy
- 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
Main types of taxes
- direct taxes
- sales taxes
- payroll taxes
- capital taxes
- property taxes
Debt to GDP ratio
measures the debt relative to government ability and taxpayers to finance it
role of bank of Canada
- 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
Functions of bank of Canada
- 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
Categories of debt
Marketable: treasury bills, marketable bonds
Non marketable- Canada savings bonds, Canada premium bonds
How monetary policy implemented
carried out primarily through changes in target overnight rate
Overnight rate
interest rate set out in the overnight market, where major cdn financial institutions lend each other money on overnight basis
Bank rate
Minimum rate bank of Canada will lend money on short term basis to chartered banks and other members of Canadian payments association (CPA)
2 MAIN market operations to conduct monetary policy
- 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
Large value transfer systems (LVTS)
- 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
Drawdown
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
