Chapter Five

Question 1

What is keynesian theory?

Answer 1

Advocates the use of direct government intervention as a means of achieving economic growth and stability i.e. economy enters recession increase in government spending or lower taxes to raise consumer income

Question 2

What is monetarist theory?

Answer 2

Suggests that the economy is inherently stable and left alone would automatically move to a stable path of growth e.g expand the money supply at the rate equal to growth rate.

Question 3

What is fiscal policy?

Answer 3

The use of government spending and taxation powers to pursue such economic goals as full employment and sustained long-term growth.

Question 4

What fiscal policy is the federal government responsible for?

Answer 4

EI, defense, old age security.

Question 5

What fiscal policy are provincial governments responsible for?

Answer 5

Health, education and welfare.

Question 6

When is the federal budget and what is the fiscal year?

Answer 6

Usually in February fiscal year runs from April 1 to March 31.

Question 7

Name the five types of taxes?

Answer 7

Direct taxes which is income tax. Sales tax. Payroll tax. Capital tax levied on company assets or capital. Property tax.

Question 8

Name the four duties (preamble of bank act) of the Bank of Canada?

Answer 8

To regulate credit and currency. To control and protect currency. To mitigate fluctuations in production, trade, prices and employment. To promote economic and financial welfare.

Question 9

What are the major functions of the Bank of Canada?

Answer 9

Issuance on removal off banknotes. Government fiscal agent i.e. financial advisor. To conduct monetary policy i.e. Manage supply off money-most important

Question 10

The Bank of Canada act empowers the bank to?

Answer 10

Buy and sell gold, silver and foreign currency. Maintain deposits with other central banks, commercial banks in and out off Canada. Act as agent and depository for central banks and certain international institutions.

Question 11

What does monetary policy set out to do?

Answer 11

To improve the performance of the economy by regulating the growth in money supply and credit.

Question 12

What is the current target range for inflation?

Answer 12

1 to 3%

Question 13

How does the bank keep inflation in this range?

Answer 13

If inflation approaches top off target meaning demand is rising to strongly and therefore must be controlled through an increase in short-term interest rates. If inflation falls to the bottom of target range it needs a decrease in interest rates.

Question 14

What basis points does the overnight rate operate within?

Answer 14

50 i.e. if operating band is 3% to 3.5% then the target overnight rate is 3.25%

Question 15

What is the bank rate?

Answer 15

Minimum rate that bank of Canada will lend money on a short-term basis.

Question 16

What part of the operating band is the bank rate?

Answer 16

Upper limit i.e. with an operating target range off between 3% and 3.5% the bank rate is 3.5%.

Question 17

What are the two main open market operations that the bank uses to conduct monetary policy?

Answer 17

Special purchase and resale agreements. Sale and repurchase agreements.

Question 18

What are special purchase and resale agreements?

Answer 18

To relieve undesired upward pressure overnight financial rates

Question 19

How do SPRAs work?

Answer 19

Bank offers to buy government securities from primary dealer. Bank her purchases securities from institution and pays cash i.e. short-term loan. Next day returns back.

Question 20

What are SRA’s?

Answer 20

Used to offset undesired downward pressure on overnight financing costs.

Question 21

How do you SRA’s work?

Answer 21

Bank offers to sell government securities to chartered banks next day bank repurchases those securities.

Question 22

What is LVTS?

Answer 22

Large value transfer system.

Question 23

What does LVTS do?

Answer 23

Allows financial institutions to conduct large transactions with each other through an electronic wire system.

Question 24

What is a drawdown

Answer 24

Refers to transfer of deposits to bank from charted banks.

Question 25

What does a drawdown cause?

Answer 25

Removes money from system causes contraction in availability of loans to and places upward pressure on interest rates.

Question 26

What is a re deposit deposit?

Answer 26

A transfer of funds from bank to chartered banks.

Question 27

What does a redeposit cause?

Answer 27

Adds money to system places downward pressure on interest and gives banks incentive to increase loans.

Question 28

What is rationale expectations theory?

Answer 28

Suggest that firms and workers are rationale thinkers and can evaluate all the consequences of government decision.