Unit 3: Activities 6-9

Question 1

Fiscal Policy:

Used For?

Answer 1

the manner in which the government exerts influence on the economy through its budgetary decisions

A government would do this to achieve economic goals such as the creation of more employment or the reduction of inflation.

Question 2

In what ways is the federal government able to bring expansionary fiscal policy?

Answer 2

Lowering taxes to increase the disposable income of citizens which will in turn create higher demand and employment. Increase spending on public services and programs to create more aggregate demand, jobs, and market production.

Question 3

Major goals of the federal budget…

Answer 3

Good Jobs
Affordable Housing
Pharmacare
Seniors

Question 4

Problems with Expansionary Fiscal Policy

Answer 4

• Consumer spending on imports
• Consumers saving most of income
• tax cuts on high income earners may ONLY increase demand on luxury goods
• time lag; alterations to policy take time to be carried out
• possible side effect of increased inflation

Question 5

In what ways is the federal government able to bring contractionary fiscal policy?

Answer 5

Raising taxes if inflation is too high to create less disposable income, therefore lower prices.
Decrease of spending will decrease aggregate demand, which is needed in times of inflation.

Question 6

Economic Stabilizers…

Answer 6

During economic downturn, employment insurance payments and welfare payments are cushions for lost jobs

During economic upturn, the progressive tax system prevents excessive inflation

Question 7

What does the federal budget accomplish?

Answer 7

• Outlines future fiscal policy plans

- political goals included and may contradict economic goals

Question 8

Budget:

Answer 8

the government’s statement of its fiscal policies. It is usually presented once a year, although there is no requirement for an annual presentation.

Question 9

Balanced budget:

Answer 9

a budget in which expenditures equal income in the current year. In 1998, the federal government achieved its first balanced budget in almost 30 years.

Question 10

Deficit:

Answer 10

the amount by which expenditures exceeds income in the current year.

Question 11

Surplus:

Answer 11

the amount by which income exceeds expenditures in the current year.

Question 12

Debt:

Answer 12

the accumulated deficits of past years’ budgets. It is owed to both Canadians and investors from abroad.

Question 13

Debt charges:

Answer 13

the total cost of servicing or paying interest on the accumulated debt for one year. The amount of debt charges is related to the size of the debt and the level of interest rates.

Question 14

Critics of Canada’s Debt….

Answer 14

Some believe that a large public debt imposes a large burden on Canada.

   - Public debt must be serviced (interest)
   - 80% owed to wealthy Canadians and Canadian companies
   - When paid back, rich get richer

Question 15

Defenders of Canada’s Debt…..

Answer 15

Some commentators argue that government debt is a necessary part of modern fiscal policy.
-If money is borrowed to build roads, bridges, hydroelectric projects and other infrastructure buildings, then future generations will continue to benefit from the borrowed money.

Others argue that existing government debt should not be reduced if it means taking away government funding for the unemployed, the disabled, the sick, and others who are in need.

Question 16

Fraser Institute on Canada’s Debt…

Answer 16

Favors less government spending, less government debt, and more competition in the marketplace

Question 17

CUPE on Canada’s Debt….

Answer 17

They argue that eliminating certain federal transfer payments to the provinces means the elimination of federal funding for universities, colleges, social assistance, affordable housing, child care etc.

Government spending is necessary, especially in a recession or recovery stage of the business cycle.

Question 18

Money:

Answer 18

anything that is generally acceptable as payment for goods and services.

Question 19

Functions of Money…

Answer 19

Medium of Exchange
A Measure of Value
-Comparisons between prices can easily be made
A Store of Value
-It can be converted into other assets almost immediately

Question 20

Characteristics of Money…

Answer 20

• Must be generally acceptable
• Should be portable and easy to use
• Should be durable
• Must be easily divided into units to facilitate both small and large purchases
• Various units of coins and bills should be readily recognizable by shape/colour
• Should be designed with materials that are difficult to duplicate
• Must retain its value over time

Question 21

Fractional Reserve…

Answer 21

allows banks to keep only a fraction of their deposits while lending out the rest with interest to other clients.

Canadian banks have a 0% reserve requirement, thus affording them the ability to create a virtually unlimited amount of money.

Question 22

Branch Banking…

Answer 22

13 chartered banks
unlimited number of branches
5 banks dominate 90%

If one bank branch faces a large number of cash withdrawals, they can ask other branches to supply the necessary cash

Question 23

Bank of Canada…

Answer 23

Banker to the chartered banks.
-The chartered banks have deposit accounts with the central bank and take loans from the Bank of Canada.
Banker to the federal government.
-The central bank handles foreign exchange reserves; such as US dollar.
Responsible for the issue of paper currency.
-It decides on the design, amount, and anti-counterfeiting measures in paper currency.
The Bank of Canada is the director of Canadian monetary policy

Question 24

Monetary policy:

Answer 24

set of decisions a government makes, usually through its central bank, about the amount of money in circulation in the economy.

Question 25

Goal of Canadian Monetary Policy…

Answer 25

• Contribute to rising living standards through low, stable inflation
• Bank of Canada aims to keep the rate of inflation, as measured by the annual rate of increase in the consumer price index, inside a target range; 2%

Question 26

Importance of Money Supply…

Answer 26

• An increase in the money supply without an increase in production leads to inflation.
• A decrease in the money supply can possibly lead to a stagnant economy – with not enough money available for loans and expansion.

Question 27

Bank of Canada and Monetary Policy….

Answer 27

• By raising interest rates, the Bank of Canada makes the price of borrowing money more expensive and shrinks the money supply
• By lowering interest rates, the Bank of Canada makes the price of borrowing money less expensive and expands the money supply

Question 28

The overnight lending rate:

Answer 28

the rate at which the Bank of Canada lends money to the chartered banks.

Question 29

Increase in overnight lending rate…

Answer 29

• Encourages chartered banks to increase own rates in order to continue making a profit
• Reduced demand for credit

Question 30

Decrease in overnight lending rate….

Answer 30

• Chartered banks decrease own rates
• Increase in demand for credit
• Commercial banks increase their quantity of credit supplied

Question 31

Milton Friedman and monetary policy…

Answer 31

• inflation is always and everywhere
• minimize role of government in free market
• link between inflation and money supply

Question 32

Problems with High Inflation….

Answer 32

• Uncertainty
• higher worth of dollar compared to other countries
• net exports declines; imports increase

Question 33

how long does it take for monetary policy to take effect?

Answer 33

12-18 months

Question 34

Importance of interest rates….

Answer 34

lower rates=more money lent=easier for businesses to expand