Chapter 5

Question 1

What are the key tools for government fiscal policy

Answer 1

Spending and taxation

Question 2

What is the role of the bank of canada and their four main areas of responsiblity

Answer 2

They promote economic and financial welfare of canada.

1. monetary policy (preserve value of money, keep inflation low, stable and predictable (1-3%)
2. canadian financial sytem
3. physical currency
4. Fund management

Question 3

What is the target overnght rate

Answer 3

It is the interest rate that the major canadian institutions lend to eachother in the form of one day loans. They set a bad of 50 basis points. (1 basis point = 1/100 of a percentage). The upper limit is bank rate and middle point is target rate.

Question 4

What are overnight repos

Answer 4

It is used when the Bank wants to push interest rates down. If overnight rate > target rate, they will offer to lend money at a lower rate.

Question 5

What are reverse overnight repos

Answer 5

If overnight rate > target rate, the Bank will borrow at a higher rate. Done if banks are lending overnight at a rate that is lower than operating band. (They will borrow at lower end which is still higher than people can lend for)

Question 6

What are drawdowns?

Answer 6

When the bank transfers deposits from chartered banks, thus reducing money supply, therefore increasing interest rates

Question 7

What are Redeposits?

Answer 7

When the bank transfers money into chartered banks, this decreases. interest rates

Question 8

What is the lynx system?

Answer 8

It allows financial institutions to send large wires with same day settlement so they know net outcomes of flows.

Question 9

What is difference between fiscal and monetary policy?

Answer 9

Fiscal policy is done by government through government spending and taxes. monetary policy is done through influencing interest rates.