Chapter 5 Flashcards
What is the difference between fiscal policy and monetary policy?
Fiscal policy: informs government decisions around use of spending and taxation powers, influences economic activity, employment levels, growth
Monetary policy: tools are interest rate and money supply, goal is to preserve the value of money by keeping inflation low, stable and predictable
FISCAL = spending + taxation
MONETARY = interest rates + money supply
Describe difference between budget surplus and deficit
Budget surplus = revenue > spending
Budget deficit = revenue < spending
Balanced budget = revenue = spending
How would you define the national debt
Accumulated past deficits minus accumulated past surpluses in the federal budget
How does the government affect the economy through spending?
Governments can increase spending to stimulate the economy OR reduce spending when inflation is a concern
How does the government affect the economy through taxation?
To stimulate economy, government can lower personal taxes, so consumers spend more OR increase taxation to lower inflation
Outline the Bank of Canada’s 4 main areas of responsibility
- Monetary Policy; to preserve value of CAD, keep inflation low and stable
- Canadian Financial System; to promote and maintain efficient financial systems
- Physical Currency; painting and distributing CAD
- Funds Management; Bank of Canada is the fiscal agent for the Government, advises financial matters
What are key monetary policy tools employed by Bank of Canada?
How do tools affect inflation and recession/unemployment
Interest Rate + Money Supply
Inflation: to slow inflation, increase interest rates and decrease money supply
Recession: to stimulate economy, lower interest rates, and increase money supply
Describe difference between SPRA and SRA
Special Purchase and Resale Agreement
Overnight repo, to push interest rates down, if overnight rate is trading above target rate. SPRA lends money at a lower rate, increase supply, rates fall
Bank purchases t-bills, gives institutions more money to lend out, increases money supply
Sales and Repurchase Agreement
Overnight reverse repo, to increase interest rates, if overnight rate is trading below target rate.
Bank sells t-bills, reduces money supply, rates rise
What effects would drawdowns and redeposits have on inflation?
Drawdown: transfer of deposits from chartered bank to Bank. lowers money supply, interest rates rise, consumers spend less
Redeposit: transfer of deposits from Bank to chartered bank. increases money supply, interest rates fall, consumers spend more
What is the target overnight rate of interest?
Overnight rate is the interest rate set in the overnight market
Overnight rate targets short-term interest rates
Operates within 50 basis points
BANK RATE = upper limit of the operating band
If Bank of Canada lowers target overnight rate from 1.75 to 1.25, what happens to operating band?
If operating band is 1.5 - 2.0, target overnight rate is 1.75
If target overnight rate is 1.25, operating band would be 1.0 - 1.50
Describe the Large Value Transfer System
Allows participating financial institutions to conduct large transactions through wire system
List and explain some challenges of implementing government policy
Timing lags: delay between recognizing problem, implementing solution and seeing results
Political consideration: campaigning issues
Future expectation: expectation can cause policy to fail
Coordination of federal, provincial and municipal policy: not all Canadians need the same intervention
High federal debt: reduces flexibility with spending
Impact on international economies: performance of trading partners has impact on Canadian economy
