CSC V.1 Chapter5 notes – From Shanghai To Halifax

Defined as the use of government’s power to tax and spend to pursue social goals such as full employment and long-term sustained economic growth
If government revenues exceed spending, it is running a surplus. If spending exceeds revenues, it is running a deficit. When governments run deficits, they must compete for capital with private institutions
The national debt consists of accumulated past deficits minus accumulated past surpluses

Main role of the Bank is “to promote the economic and financial welfare of Canada”
Bank has four main areas of responsibility:

Monetary policy – designed to preserve the value of the Canadian dollar by keeping inflation low, stable, and predictable
The Canadian financial system – Bank of Canada is the ultimate source of liquidity and is referred to as the lender of last resort
Physical currency – designs, prints, and distributes Canadian bank notes
Funds management – manages the government’s accounts and government’s foreign currency reserves

	Interest Rates	Money Supply
Inflation Demand for goods and services is growing faster than supply, which causes prices to increase The Bank wants to slow down the pace of demand	1. The Bank raises interest rates 2. Borrowing becomes more expensive 3. Borrowing decreases and consumption and business investment decreases	1. The Bank reduces the money supply 2. Interest rates rise in response 3. Borrowing becomes more expensive 4. Borrowing decreases and consumptions and business investment decrease
Recession and Unemployment Demand for goods and services is lower than supply, which causes growth in the economy to decline The Bank wants to stimulate spending to increase demand	1. The Bank lowers interest rates 2. Borrowing becomes more affordable 3. Borrowing increases and consumption and business investments go up	1. The Bank increases the money supply 2. Interest rates go down in response 3. Borrowing becomes more affordable 4. Borrowing increases and consumption and busin

Bank of Canada carries out monetary policy through changes in the Target for the Overnight Rate; Open market operations; and Drawdowns and redeposits
Overnight rate – interest rate set in the overnight market, where major Canadian financial institutions lend each other money on a short-term basis. The band for the overnight rate is 50 basis point – ½ of 1%. The Bank Rate is the minimum rate at which the Bank of Canada will lend money on a short term basis to the Chartered Banks and other members of the Canadian Payments Association (CPA). The Bank Rate is the upper limit of the operating band for the Overnight Rate
Open market operations – these are voluntary transactions conducted between the Bank of Canada and Chartered Banks to influence the level of interest rates. The two main open market operations are Special Purchase and Resale Agreements (SPRAs) and Sale and Repurchase Agreements (SRAs)

SPRAs (also known as overnight repos) are used by the Bank to relieve undesired upward pressure on interest rates. The Bank will purchase government securities from a primary dealer with an agreement to buy them back the next day at a predetermined price. In the short run, this means that more money is in the system, which has a downward effect on interest rates
SRAs (also known as overnight reverse repos) are used by the Bank to relieve undesired downward pressure on interest rates. The Bank will sell government securities to a primary dealer with an agreement to sell them back the next day at a predetermined price. In the short run, this means that less money is in the system, which has an upward effect on interest rates
The Bank of Canada can also influence short-term interest rates with drawdowns and deposits, moving federal
government money to and from the Bank of Canada and Chartered Banks. If the Bank wants to lower interest rates, it will effect a redeposit, moving funds into the Chartered Banks. If the Bank wants to increase interest rates, it will effect a drawdown which takes funds from the Chartered Bank system

Timing lags – both fiscal policy and monetary policy have lags for a variety of reasons
Political considerations
Future expectations – these can cause a policy to fail
Coordination of federal, provincial, and municipal policies
High federal debt
Impact of international economics

Economic Issue	Fiscal Policy	Monetary Policy
Unemployment and recession Increase consumer spending and investment with expansionary policies	1. Increase spending 2. Decrease taxes	1. Increase money supply 2. Decrease interest rates
High inflation Reduce consumer spending and investment with contractionary policies	1. Decrease government spending 2. Increase taxes	1. Decrease money supply 2 Increase interest rates

Monetary Policy	Fiscal Policy
Advantages 1. The effect on the economy may be more immediate 2. The initiative (e.g., lower or higher interest rates) can be reversed once the objective is achieved 3. It is independent of political considerations	Advantages 1. Government spending can be targeted to specific regions 2. Tax cuts and increased benefits are popular 3. Consumers can more easily understand and experience the impact
Disadvantages 1. It can be difficult to target a specific region 2. Lowering interest rates may not have any impact if the consumer doesn’t feel confident enough to spend 3. If interest rates are already too low, lowering them even more may have no impact	Disadvantages 1. Tax increases and government spending cuts are unpopular 2. There are challenges in stopping a project one it has been implemented, even if the initiative is no longer necessary 3. Higher government spending can raise debt levels and lead to a great proportion of revenue going towards interest payments

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