Unit 3: Activities 6-9 Flashcards
(34 cards)
Fiscal Policy:
Used For?
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.
In what ways is the federal government able to bring expansionary fiscal policy?
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.
Major goals of the federal budget…
Good Jobs
Affordable Housing
Pharmacare
Seniors
Problems with Expansionary Fiscal Policy
- 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
In what ways is the federal government able to bring contractionary fiscal policy?
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.
Economic Stabilizers…
During economic downturn, employment insurance payments and welfare payments are cushions for lost jobs
During economic upturn, the progressive tax system prevents excessive inflation
What does the federal budget accomplish?
- Outlines future fiscal policy plans
- political goals included and may contradict economic goals
Budget:
the government’s statement of its fiscal policies. It is usually presented once a year, although there is no requirement for an annual presentation.
Balanced budget:
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.
Deficit:
the amount by which expenditures exceeds income in the current year.
Surplus:
the amount by which income exceeds expenditures in the current year.
Debt:
the accumulated deficits of past years’ budgets. It is owed to both Canadians and investors from abroad.
Debt charges:
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.
Critics of Canada’s Debt….
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
Defenders of Canada’s Debt…..
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.
Fraser Institute on Canada’s Debt…
Favors less government spending, less government debt, and more competition in the marketplace
CUPE on Canada’s Debt….
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.
Money:
anything that is generally acceptable as payment for goods and services.
Functions of Money…
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
Characteristics of Money…
- 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
Fractional Reserve…
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.
Branch Banking…
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
Bank of Canada…
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
Monetary policy:
set of decisions a government makes, usually through its central bank, about the amount of money in circulation in the economy.
