Volume 1- Chapter 5 Flashcards
What is fiscal policy?
Fiscal policy informs government decisions around the use of its spending and taxation powers.
How does fiscal policy impact economic performance?
Fiscal policy influences economic activity, employment levels, and sustained long-term growth.
What is the primary balancing act in fiscal policy?
Balancing taxes and spending.
Which levels of government implement fiscal policy?
Both federal and provincial governments.
What services does the federal government provide?
National defence, employment insurance, pension income for seniors and the disabled, veterans’ affairs, foreign affairs, and indigenous and northern affairs.
What services do provincial governments provide?
Health care, education, securities regulation, and various social services.
What is a significant component of federal spending?
Transfer payments to provincial governments.
What does the federal budget include?
Projected spending, revenue, surplus or deficit, and debt for the coming fiscal year.
What are the three possible positions of a proposed annual budget?
- Revenue > Spending = Budget surplus
- Revenue < Spending = Budget deficit
- Revenue = Spending = Balanced budget
What constitutes the national debt?
Accumulated past deficits minus accumulated past surpluses in the federal budget.
How do governments finance deficits?
By issuing debt instruments such as bonds and Treasury bills.
What is the effect of government borrowing on capital markets?
It can lead to crowding out, reducing available capital for businesses and increasing interest rates.
What are the three major components of GDP?
Government spending, consumer spending, and business spending and investment.
What are the key fiscal policy tools used by the government?
- Spending
- Taxation
What does the government do to stimulate the economy through taxation?
Lower personal and business taxes to increase disposable income.
What was a major economic issue in Canada during the 1980s?
Persistent deficits leading to increased borrowing and a larger national debt.
What is the federal debt in Canada as a percentage of GDP as of the end of the 2022-23 fiscal year?
42.2%
What is the primary role of the Bank of Canada?
To promote the economic and financial welfare of Canada.
What is the main function of monetary policy?
To preserve the value of the Canadian dollar by keeping inflation low, stable, and predictable.
Who is responsible for the affairs of the Bank of Canada?
A Governing Council composed of the Governor, Senior Deputy Governor, and additional Deputy Governors.
What is the target overnight rate?
The interest rate set in the overnight market for one-day loans between financial institutions.
What does the Bank of Canada use to control inflation?
Inflation-control targets.
What are the four main areas of responsibility of the Bank of Canada?
- Monetary policy
- The Canadian financial system
- Physical currency
- Funds management
True or False: The Bank of Canada administers monetary policy with day-to-day intervention from the government.
False
What is the role of the Bank as a fiscal agent for the Government of Canada?
To manage the government’s accounts and foreign currency reserves, and federal debt.
Fill in the blank: The Bank of Canada aims to keep inflation between _______.
[1% and 3%]
What is the significance of the debt-to-GDP ratio?
It is regarded as a sound measure of a country’s overall debt burden.
What happens when government spending increases during a recession?
It raises consumer income and spending, leading businesses to expand production and hire more workers.
What is the target for the overnight rate of interest set by the Bank of Canada?
The target is set within a specific operating band, which includes a range of interest rates.
How often does the Bank of Canada announce changes to the target rate?
The Bank announces changes on eight pre-set fixed dates during the year.
What is the purpose of lowering the target rate from 1.0% to 0.75%?
To ease monetary conditions, making it cheaper for consumers and businesses to borrow money.
What happens when the Bank of Canada raises the target rate?
It tightens monetary conditions, making it more expensive to borrow money.
What are the two main open market operations used by the Bank of Canada?
- Overnight repos
- Overnight reverse repos
What is an overnight repo?
A transaction where the Bank lends money at a lower rate to push interest rates down.
How does an overnight repo work?
The Bank lends money on an overnight basis, purchasing Treasury bills from a financial institution.
What is the effect of the Bank’s purchase of Treasury bills during an overnight repo?
It increases the money available in the financial system, causing the overnight rate to fall.
What is an overnight reverse repo?
A transaction where the Bank borrows money at a higher rate to increase interest rates.
How does an overnight reverse repo work?
The Bank sells Treasury bills to financial institutions to borrow money.
What is the impact of a drawdown on the banking system?
It drains the supply of available cash balances, causing interest rates to increase.
What is a redeposit?
A transfer of funds from the Bank to chartered banks, increasing the money available in the financial system.
What are the challenges governments face when implementing fiscal and monetary policy?
- Timing lags
- Political considerations
- Future expectations
- Coordination of policies
- High federal debt
- Impact of international economies
What is a political business cycle?
The tendency of politicians to implement policies that favor re-election, which may conflict with economic reality.
What is the impact of timing lags on policy effectiveness?
Delays between recognizing an economic issue and seeing the benefits of policy actions make decisions more difficult.
What are the advantages of monetary policy?
- Immediate effect on the economy
- Initiatives can be reversed
- Independent of political considerations
What are the disadvantages of fiscal policy?
- Tax increases are unpopular
- Challenges in stopping projects once implemented
- Higher spending can raise debt levels
Fill in the blank: The Bank of Canada uses _______ to influence short-term interest rates.
[drawdowns and redeposits]
True or False: Lynx is Canada’s high-value payment system that facilitates the transfer of payments in Canadian dollars.
True
