Volume 1- Chapter 5

Question 1

What is fiscal policy?

Answer 1

Fiscal policy informs government decisions around the use of its spending and taxation powers.

Question 2

How does fiscal policy impact economic performance?

Answer 2

Fiscal policy influences economic activity, employment levels, and sustained long-term growth.

Question 3

What is the primary balancing act in fiscal policy?

Answer 3

Balancing taxes and spending.

Question 4

Which levels of government implement fiscal policy?

Answer 4

Both federal and provincial governments.

Question 5

What services does the federal government provide?

Answer 5

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

Question 6

What services do provincial governments provide?

Answer 6

Health care, education, securities regulation, and various social services.

Question 7

What is a significant component of federal spending?

Answer 7

Transfer payments to provincial governments.

Question 8

What does the federal budget include?

Answer 8

Projected spending, revenue, surplus or deficit, and debt for the coming fiscal year.

Question 9

What are the three possible positions of a proposed annual budget?

Answer 9

• Revenue > Spending = Budget surplus
• Revenue < Spending = Budget deficit
• Revenue = Spending = Balanced budget

Question 10

What constitutes the national debt?

Answer 10

Accumulated past deficits minus accumulated past surpluses in the federal budget.

Question 11

How do governments finance deficits?

Answer 11

By issuing debt instruments such as bonds and Treasury bills.

Question 12

What is the effect of government borrowing on capital markets?

Answer 12

It can lead to crowding out, reducing available capital for businesses and increasing interest rates.

Question 13

What are the three major components of GDP?

Answer 13

Government spending, consumer spending, and business spending and investment.

Question 14

What are the key fiscal policy tools used by the government?

Answer 14

• Spending
• Taxation

Question 15

What does the government do to stimulate the economy through taxation?

Answer 15

Lower personal and business taxes to increase disposable income.

Question 16

What was a major economic issue in Canada during the 1980s?

Answer 16

Persistent deficits leading to increased borrowing and a larger national debt.

Question 17

What is the federal debt in Canada as a percentage of GDP as of the end of the 2022-23 fiscal year?

Answer 17

42.2%

Question 18

What is the primary role of the Bank of Canada?

Answer 18

To promote the economic and financial welfare of Canada.

Question 19

What is the main function of monetary policy?

Answer 19

To preserve the value of the Canadian dollar by keeping inflation low, stable, and predictable.

Question 20

Who is responsible for the affairs of the Bank of Canada?

Answer 20

A Governing Council composed of the Governor, Senior Deputy Governor, and additional Deputy Governors.

Question 21

What is the target overnight rate?

Answer 21

The interest rate set in the overnight market for one-day loans between financial institutions.

Question 22

What does the Bank of Canada use to control inflation?

Answer 22

Inflation-control targets.

Question 23

What are the four main areas of responsibility of the Bank of Canada?

Answer 23

• Monetary policy
• The Canadian financial system
• Physical currency
• Funds management

Question 24

True or False: The Bank of Canada administers monetary policy with day-to-day intervention from the government.

Answer 24

False

Question 25

What is the role of the Bank as a fiscal agent for the Government of Canada?

Answer 25

To manage the government’s accounts and foreign currency reserves, and federal debt.

Question 26

Fill in the blank: The Bank of Canada aims to keep inflation between _______.

Answer 26

[1% and 3%]

Question 27

What is the significance of the debt-to-GDP ratio?

Answer 27

It is regarded as a sound measure of a country’s overall debt burden.

Question 28

What happens when government spending increases during a recession?

Answer 28

It raises consumer income and spending, leading businesses to expand production and hire more workers.

Question 29

What is the target for the overnight rate of interest set by the Bank of Canada?

Answer 29

The target is set within a specific operating band, which includes a range of interest rates.

Question 30

How often does the Bank of Canada announce changes to the target rate?

Answer 30

The Bank announces changes on eight pre-set fixed dates during the year.

Question 31

What is the purpose of lowering the target rate from 1.0% to 0.75%?

Answer 31

To ease monetary conditions, making it cheaper for consumers and businesses to borrow money.

Question 32

What happens when the Bank of Canada raises the target rate?

Answer 32

It tightens monetary conditions, making it more expensive to borrow money.

Question 33

What are the two main open market operations used by the Bank of Canada?

Answer 33

* Overnight repos * Overnight reverse repos

Question 34

What is an overnight repo?

Answer 34

A transaction where the Bank lends money at a lower rate to push interest rates down.

Question 35

How does an overnight repo work?

Answer 35

The Bank lends money on an overnight basis, purchasing Treasury bills from a financial institution.

Question 36

What is the effect of the Bank's purchase of Treasury bills during an overnight repo?

Answer 36

It increases the money available in the financial system, causing the overnight rate to fall.

Question 37

What is an overnight reverse repo?

Answer 37

A transaction where the Bank borrows money at a higher rate to increase interest rates.

Question 38

How does an overnight reverse repo work?

Answer 38

The Bank sells Treasury bills to financial institutions to borrow money.

Question 39

What is the impact of a drawdown on the banking system?

Answer 39

It drains the supply of available cash balances, causing interest rates to increase.

Question 40

What is a redeposit?

Answer 40

A transfer of funds from the Bank to chartered banks, increasing the money available in the financial system.

Question 41

What are the challenges governments face when implementing fiscal and monetary policy?

Answer 41

* Timing lags * Political considerations * Future expectations * Coordination of policies * High federal debt * Impact of international economies

Question 42

What is a political business cycle?

Answer 42

The tendency of politicians to implement policies that favor re-election, which may conflict with economic reality.

Question 43

What is the impact of timing lags on policy effectiveness?

Answer 43

Delays between recognizing an economic issue and seeing the benefits of policy actions make decisions more difficult.

Question 44

What are the advantages of monetary policy?

Answer 44

* Immediate effect on the economy * Initiatives can be reversed * Independent of political considerations

Question 45

What are the disadvantages of fiscal policy?

Answer 45

* Tax increases are unpopular * Challenges in stopping projects once implemented * Higher spending can raise debt levels

Question 46

Fill in the blank: The Bank of Canada uses _______ to influence short-term interest rates.

Answer 46

[drawdowns and redeposits]

Question 47

True or False: Lynx is Canada’s high-value payment system that facilitates the transfer of payments in Canadian dollars.

Answer 47

True