Chap 5, Economic Policy Flashcards
Informs government decisions around the use of its spending and taxation power.
Fiscal Policy
A balancing act between taxation and spending.
Fiscal Policy
These gov’ts implement certain elements of fiscal policy
Federal and Provincial
Responsible for national defense, employment insurance, pension income for seniors and the disabled, veterans’ affairs, foreign affairs, and indigenous and northern affairs.
Federal Government
Responsible for health care, education, securities regulation, and various social services.
Provincial Government
The governments revenue comes primarily from different forms of ______
Taxation
Consists of accumulated past deficits minus accumulated past surpluses in the federal budget
National Debt
Governments finance deficits by issuing debt instruments such as ___ and ___ in the capital markets.
Bonds and T-bills
When the government borrows significantly from the capital markets, less capital remains for businesses to borrow. This effect is referred to as _____, and can have a negative impact on the economy.
Crowding Out
Comprises of 3 major components: government spending, consumer spending, and business spending and investment
GDP
Tells us what the government plans to do with respect to taxation and spending.
Federal Budget
Government spending on infrastructure can have a _____ effect on the whole economy.
Stimulating
If the government wants to stimulate the economy, it can ____ personal taxes.
Lower
As with spending, the government may _____ taxation to lower inflation, making it more difficult for consumers and businesses to spend.
Increase
The nation’s central bank
Bank of Canada
Responsible for the affairs of the Bank of Canada
Governing Council
The Governing Council is composed of
The governor, the senior deputy governor, and four deputy governors.
The main role of the __________ is “to promote the economic and financial welfare of Canada”
Bank of Canada
The Bank’s four main areas of responsibility:
Monetary Policy, The Canadian Financial System, Physical Currency, Funds Management
Oversees the main clearing and settlement systems.
The Bank of Canada
The ultimate source of liquidity in the financial system and referred to as the lender of last resort.
Bank of Canada
Responsible for designing, printing, and distributing Canadian dollars
Bank of Canada
The fiscal agent for the government of Canada
Bank of Canada
Manages the governments foreign currency reserves
Bank of Canada
Manages the governments federal debt, which consists mostly of T-bills and marketable bonds.
Bank of Canada
Provides advice to the federal government regarding what debt can be issued, at what interest rate, and for what term, based on its assessment of the capital markets
Bank of Canada
The goal of __________ is to preserve the value of money by keeping inflation low, stable, and predictable.
Monetary Policy
Since 1991, the Bank has acted to keep inflation between ___ and ___ by using inflation-control targets
1% and 3%
The Bank’s key monetary policy tools are _____ and _____
Interest rates and the money supply.
The Bank can influence interest rates and the money supply through the following means:
Target overnight rate, Open market operations, Drawdowns and Redeposits
The most important monetary policy tool the Bank uses
Target overnight rate
The overnight rate operates within an operating band that is ____ basis points wide.
50
50 basis points are equal to ___ %
.5%
The Bank Rate is the ____ ____ of the operating band
Upper Limit
The Bank announces whether or not it will change the target rate on _____ pre-set fixed dates during the year.
8
The two main Open Market Operations that the Bank uses to conduct monetary policy are ____________ and ___________
Special Purchase and Resale Agreements (SPRA) and Sale and Repurchase Agreements (SRA)
________ are used by the Bank when it wants to push interest rates down. (SPRA) or (SRA)
Special Purchase and Resale Agreements (SPRAs)
Open Market operation used to increase the interest rate.
Sale and Repurchase Agreements (SRAs)
Each day, billions of dollars flow through Canada’s financial system to settle transactions between major financial institutions. These transactions include cheques, wire transfers, direct deposits, pre-authorized debits, and bill payments.
To facilitate the transfer of these payments, the Bank established the ___________ in 1991
Large Value Transfer System (LVTS)
This system allows participating financial institutions to conduct large transactions with each other through an electronic wire system.
Large Value Transfer System
Helps to ensure that trading in the overnight market stays within the Bank’s 50-basis-point operating target.
Large Value Transfer System
A ______ is the transfer of deposits to the Bank from the chartered banks, which effectively drains the supply of available cash balances from the banking system.
Drawdown
Drawdowns cause interest rates to _______
Increase
A _____ is a transfer of funds from the Bank to the chartered banks. This increase in deposits and reserves increases the money supply.
Redeposits
Redeposits cause interest rates to ________
Decrease
In economics, there are delays between recognizing an economic problem, deciding what policy action to take to solve the problem, implementing the policy, and ultimately seeing the benefit of the policy in action. These _________ make monetary policy decisions more difficult and policy actions less effective.
Timing Lags
Politicians typically work towards re-election, which creates what is known as a political business cycle. While campaigning, they may advocate lowering taxes or spending on programs and infrastructure in their own riding. However, once they are elected, the national economic reality may call for lower spending. This challenge is called _______
Political Considerations
Expectations can cause a policy initiative to fail. For example, the gov’t may announce that it will cut personal tax rates to stimulate the economy. However, if the consensus is that the gov’t is doing so only because it is near the end of its mandate, or if the tax cut is widely expected to be soon reversed, consumers may see it as a short-term action. Therefore, consumers my choose to save the tax cut, instead of increase spending, and the policy initiative fails. This challenge is called _______
Future Expectations
Canada is a large country, with diverse populations and needs. For policy initiatives to work, they must be implemented nationally. However, not all of Canada may need the same intervention. This challenge is called _______
Coordination of federal, provincial, and municipal policies
Several years of deficits can reduce the gov’ts flexibility with the respect to spending. The higher the gov’t debt, the higher the interest payments that must be made. A gov’ts plan to lower spending to fight inflation may fail if the interest payments are very high. This challenge is called _______
High Federal Debt
The economic performance of our major trading partners can have a significant impact on our economy This challenge is called _______
The impact of international economies
A government’s _________ influences economic activity, employment levels, and sustained long-term growth.
Fiscal Policy
