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CSC Master list v1.0 Vol 1 > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

When federal minister of finance announces the government’s budgetary requirements annually?

A

Often in February. and this serves as the government’s annual fiscal policy score card of spending and taxation measures.

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2
Q

What is fiscal policy?

A

Informing government (federal and provincial level) decisions around the use of its spending and taxation powers. Mostly balancing act between taxes and spending.

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3
Q

What is fiscal policy in federal government mainly responsible for?

A

services including national defence, employment insurance, pension income for seniors and the disabled, veterans’ affairs, foreign affairs, and indigenous and northern affairs.

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4
Q

What is fiscal policy in provincial government mainly responsible for?

A

other services including health care, education, securities regulation, and various social services. (both federal and provincial have shared responsibility and A large segment of federal spending consists of transfer payments to the provincial governments to help pay for that.

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5
Q

What is the main income of federal budget?

A

Taxation

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6
Q

what are the federal budget position?

A

there are 3

  1. budget surplus : revenue > spending
  2. budget deficit : revenue = spending
  3. balanced budget : revenue = spending
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7
Q

When is the fiscal year?

A

from April 1 to March 31

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8
Q

What is national debt?

A

accumulated past deficits - accumulated past surpluses in the federal budget

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9
Q

What are the most important number in national budget?

A

The amount of the surplus or deficit each year, along with the current national debt.

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10
Q

why the government need to borrow money from the market?

A

for refinanced debt and new debt

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11
Q

what is the crowding out effect?

A

when a government borrows significantly from the capital markets, less capital remains for businesses to borrow -> price goes up -> cost more to borrow money = i rises

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12
Q

what are the key fiscal tool of government?

A

spending and taxation.

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13
Q

what are the two main view about fiscal policy?

A

Keynesian economics (fiscal policy works) and the monetarist theory (government shouldn’t use fiscal policy, only monetary policy works)

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14
Q

How government spending affect the economy?

A

increase spending to stimulate economy (hiring people and buy new material to build infrastructure -> more income -> more spending -> businesses increase) and reduce when high inflation

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15
Q

How taxation help government to affect the economy?

A

decrease tax on customer and business -> increase spending and investment -> increase unemployment rate. When inflation too high government can increase the taxation to reduce spending.

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16
Q

What is the main role of Bank of Canada?

A

to promote the economic and financial welfare of Canada by the money supply and acts to stabilize the Canadian economy by using monetary policy.

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17
Q

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

A
  1. Monetary policy
  2. The Canadian financial system (promote and maintain the efficient operation of the financial system by overseeing the main clearing and settlement systems, working with domestic and international regulatory bodies, providing liquidity to the financial markets, and giving advice to the federal government. In its role as the nation’s central bank, the Bank is technically the ultimate source of liquidity in the financial system, and is referred to as the lender of last resort)
  3. Physical currency (designing, printing, and distributing Canadian bank notes)
  4. Funds management (The Bank is the fiscal agent for the Government of Canada by help to manage income and spending, currency reserves, federal debt, provide advice regarding)
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18
Q

what is the main goals of monetary policy?

A

to preserve the value of money in the economy by keeping inflation low, stable, and predictable.

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19
Q

What are the key tools of monetary policy?

A

interest rates and the money supply

20
Q

What can the bank do when there is high Inflation? (tighten monetary condition) (Demand for goods and services is growing faster than supply, which causes prices to increase)

A
  1. raises interest rates (Borrowing becomes more
    expensive -> Borrowing decreases and consumption and business investment therefore decrease)
  2. The Bank reduces the money supply (-> Interest rates rise in response -> Borrowing decreases and consumption and business investment therefore decrease)
21
Q

What can Bank of Canada do in Recession and high unemployment? (ease monetary condition)

A
  1. Lower the interest rate

2. Increase money supply

22
Q

What can the bank of Canada to influence the interest rate?

A
  1. Target overnight rate
  2. Open market operations
  3. Drawdowns and redeposits
23
Q

What is overnight rate?

A

is the interest rate set in the overnight market, a marketplace wherein major Canadian financial institutions lend each other money in the form of one-day loans (called overnight loans)

24
Q

What can overnight rate affect to?

A

Changes in the target for the overnight rate influence other short-term interest rates, for such things as consumer loans or mortgages

25
Q

How Bank of Canada use overnight rate?

A

The overnight rate operates within an operating band that is 50 basis points wide. Each day, the Bank targets the mid-point of the operating band as its key monetary policy objective. For example, if the operating band is 1.5% to 2.0%, then the target for the overnight rate is 1.75%).

26
Q

what is the bank rate?

A

The Bank Rate is the rate of interest that the Bank charges on one-day loans to the chartered banks and other major financial institutions who are members of Payments Canada. The Bank Rate and the operating band are adjusted simultaneously whenever the Bank changes the target for the overnight rate of interest.

27
Q

When does the Bank announce of changing target overnight rate?

A

on eight pre-set fixed dates during the year.

28
Q

What are main open market operations that the Bank uses to conduct monetary policy?

A
  1. Special Purchase and Resale Agreements (SPRA), commonly called Specials
  2. Sale and Repurchase Agreements (SRA)
    (The Bank initiates these transactions as often as needed, to keep the overnight market trading within the operating band)
29
Q

When will the Bank use SPRAs?

A

when it wants to push interest rates down.

30
Q

How SPRAs work?

A

The Bank offers to lend overnight (with the lower rate so that financial institutions don’t borrow else where with higher rate) by:
buying Treasury bills from a specified financial institutions with an agreement to sell them back to that bank the following day to increases the money supply.

31
Q

When will the bank use Sale and Repurchase Agreements (SRA)?

A

to increase the interest rate

32
Q

How SRA works?

A

The bank offer to borrow at the higher rate to reduce the money supply -> increase i.
(The Bank offers to borrow money by selling treasury bills on an overnight basis. The Bank essentially sells Treasury bills to other financial institutions. The next day, the transaction is reversed)

33
Q

What is Large Value Transfer System (LVTS) for?

A

To facility transactions between the major financial institutions (Throughout the day, financial institutions in the LVTS send payments back and forth to each other as part of their normal operations. At the end of each day, all of the transactions that occurred during the day are added up. At this point, some financial institutions must borrow funds, whereas others have funds left over.). LVTS participants know that the Bank will always lend money at the upper limit of the band and borrow money at the lower limit

34
Q

how DRAWDOWNS AND REDEPOSITS works?

A

The federal government maintains accounts with the Bank and the chartered banks. Given its status as lender of last resort, the Bank can transfer funds from the government’s account at the Bank to its account at the chartered banks. Conversely, the Bank can transfer funds from the government’s account at the chartered banks to its account at the Bank. The Bank uses both strategies to influence short-term interest rates.

35
Q

When should the Bank drawdown?

A

transfer money from the chartered banks to the Bank -> reduce money supply -> less money available to lend to consumers and businesses -> interest rates to increase. Consumers and businesses are less willing to borrow at these higher rates –> In tighten monetary condition

36
Q

When should the Bank redeposit?

A

transfer funds from the Bank to the chartered banks -> increase money supply -> decreases interest rates. Consumers and businesses are then more willing to borrow, and banks have more money to lend -> In ease monetary condition.

37
Q

What are the challenge of government policy?

A
  1. Timing lags
  2. Political considerations
  3. Future expectations
  4. Coordination of federal, provincial, and municipal policies.
  5. High federal debt
  6. Impact of international economies
38
Q

What should government do when high rate of unemployment and recession?

A
  1. Fiscal policy: decrease tax and increase spending.

2. Monetary policy: decrease interest and increase money supply

39
Q

What should the government do when high inflation?

A
  1. Fiscal: decrease spending and increase tax

2. Monetary: decrease money supply and increase interest rate

40
Q

Advantage of monetary policy?

A
  • effect more immediate
  • action can be reversed once objective is achieved
  • independence of politics
41
Q

Advantage of fiscal?

A
  • spending can target specific regions
  • tax cut and increased benefits are popular
  • consumers more easy to understand and experience the impact
42
Q

Disadvantage of monetary?

A
  • difficult to target specific regions
  • lower interest may not works if consumers doesn’t feel confident to spend
  • interest may be already very low and lowering more has no impact
43
Q

Disadvantage of fiscal

A
  • tax increases and government spending cut are unpopular
  • challenge to stop a project once it started
  • higher spending cab raise debt
44
Q

who help the government to manage foreign currency reserves?

A

The bank of Canada and it plays as a fiscal agent for the Government of Canada.

45
Q

what current monetary policy target does the Bank of Canada use to promote sustained economic growth with price stability?

A

maintain inflation 1-3%

46
Q

How is the Bank rate set?

A

at the upper limit of the operating band for overnight financing

CSC Master list v1.0 Vol 1 (13 decks)

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