Chapter 5 - Economic Policy Flashcards
What is the difference between fiscal policy and monetary policy?
Fiscal policy informs government decisions around the use of its spending and taxation powers. Most is a balancing act between taxes and spending. Federal and provincial governments implement fiscal policy.
Monetary policy is designed to preserve the value of the Canadian dollar by keeping inflation low, stable and predictable. The Bank makes use of inflation control targets to influence interest rates and a flexible exchange rate when conducting monetary policy.
Can you describe the difference between a budget surplus and a budget deficit?
Budget deficit - revenue is less than spending
Budget surplus - revenue is more than spending
How would you define the national debt?
National debt is accumulated past deficits minus accumulated past surpluses.
How does the government affect the economy through spending?
The government spends money to run the country. They pay for utilities, communications, salaries and supplies. Also pays for programs it sponsors and investment in infrastructure. 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?
Taxes provide the revenue for government spending. Some on businesses, some on consumers. To stimulate the economy government can lower personal taxes and then consumers have more money to spend. It can also lower business taxes in which case businesses have more money to spend. When businesses expand operations and hire more workers this can lead to a drop in the unemployment rate.
Can you outline the Bank of Canada’s four main areas of responWhat are the key monetary policy tools employed by the Bank of Canada?sibility?
- Monetary policy - designed to preserve the value of the Canadian dollar by keeping inflation low, stable and predictable.
- The Canadian financial system - Bank oversees 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. ‘Lender of Last Resort’
- Physical currency. The Bank is responsible for designing, printing and distributing Canadian bank notes.
- Funds management. The Bank is the fiscal agent for the Government of Canada. So the institution appointed to advise in and conduct various financial matters. The Bank:
- manages the governments accounts through which all money collected and spent flows.
- manages foreign currency reserves
- manages governments federal debt - treasury bills and bonds
- 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.
What are the key monetary policy tools employed by the Bank of Canada?
Interest rates and the money supply.
ie. Inflation - Bank will raise interest rates and reduce money supply.
ie. Recession & Unemployment - Bank will lower interest rates and increase the money supply.
Can you describe the difference between SRA’s and SPRA’s?
SPRA - Special Purchase & Resale Agreement
aka. overnight repos - used by the bank when it wants to push interest rates down. If the overnight rate is trading above the target rate the bank may believe that the higher rates will dampen economic activity. The bank will intervene with an spra offering to lend money at a lower rate.
SRA - aka. overnight reverse repo - goal is to increase the interest rate. If overnight money is trading below the target, the bank may believe that inflationary pressures in the economy will rise because it becomes too expensive to borrow money.
What effects would drawdowns and redeposit have on inflation?
A drawdown 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. Banks have less money to lend which causes interest rates to increase.
A redeposit is a transfer of funds from the bank to the chartered banks. This increase in deposits increases the money supply which in turn decreases interest rates.
What is the target overnight rate of interest?
The target overnight rate is the most important monetary policy the bank uses. The bank’s actions can signal a policy shift towards an easing or tightening of monetary conditions to meet its inflation control targets.
The overnight rate is the interest rate set in the overnight market wherein major Canadian financial institution lend each other money in the form of one day loans.
The overnight rate operates within an operating band that is 50 basis points wide. A basis point equals 1/100th of a percentage point.
If the Bank of Canada lowers the target for the overnight rate of interest from 1.75% to 1.25%, what happens to the operating bands?
The operating band lowers.
Can you describe the Large Value Transfer System (LVTS)?
A system that allows participating financial institutions to conduct large transactions with each other through an electronic wire system. Permits these financial institutions to track their LVTS receipts and payments electronically throughout the day and to know the net outcome of these flows by the end of the day.
Can you list and explain some of the challenges of implementing government policy?
- Timing Lags
- political considerations
- future expectations
- coordination of federal, provincial and municipal policies
- high federal debt
- impact of international economies
