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Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
Csc2 The Economy Ch 5
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Csc2 The Economy Ch 5

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Transcript

  • 1. CSI Global Education Inc. The Economy CHAPTER 5: Economic Policy
  • 2. Economic Policy in General
    • Policy makers use information about inflation, unemployment, GDP, interest rates….to formulate policy to keep the economy on a long-term stable growth path.
    • However, we do know that recessions occur, that growth is sometimes stronger, or weaker, than expected.
    • What role does the Department of Finance and the Bank of Canada play here?
    • Can you anticipate the direction of BoC policy after looking at the fundamentals of the economy?
  • 3. Fiscal Policy
    • Looking at the role of government in the area of:
    • Taxation
    • Government spending
    • Government borrowing
  • 4. Fiscal Policy
    • Looking at the role of government in the area of:
    • Taxation
    • Government spending
    • Government borrowing
  • 5. Fiscal Policy
    • Main tool of fiscal policy is the annual Federal Budget.
    • The budget contains projections for the coming year in the areas of spending, revenue, the deficit and debt.
    • Deficit = the annual mismatch in spending and revenue.
    • How have Canada’s finances changed over the last decade?
  • 6. Fiscal Policy
    • Fiscal policy can impact the economy in many key ways:
    • Spending : via government spending in the economy and through transfer payments to citizens.
    • Taxes : changes in taxes have a direct impact on spending decisions by both consumers and businesses.
    • Automatic stabilizers : policy actions that move counter to the business cycle.
      • How do these work?
  • 7. The Bank of Canada - Duties
    • Regulate credit & currency
    • Control and protect the external value of the dollar
    • Use monetary policy to reduce fluctuations in prices, employment, trade and production
    • Promote the country’s economic welfare
  • 8. The Bank of Canada – Functions
    • Issues bank notes
    • Acts as the government’s fiscal agent
    • Controller of the clearing system
    • Lender of last resort
    • Maintains orderly conditions in financial markets
    • Main and most visible function: Conduct monetary policy
  • 9. The Bank’s Influence Over Interest Rates
    • Cash management (via the growth in the money supply)
    • Open market operations (direct influence)
    • Changes in the bank rate (direct influence)
    • Moral Suasion
  • 10. Monetary Policy
    • The most important role of the BoC
    • Objective Of Monetary Policy:
    • Growth with price stability = Growth without inflation
    • Goals for max. increases in CPI:
    • inflation-control target
    • target range is 1% to 3%
    • BoC goal is to keep inflation at the 2% target midpoint
  • 11. Monetary Policy
    • Objective:
    • Moderate growth in the money supply leads to moderate growth in the economy and modest inflation, thus:
    • Monetary Policy = Management of the growth of the money supply
  • 12. The Overnight Money Market
    • The BoC implements monetary policy by influencing “overnight money”
    • The overnight market is a marketplace where financial institutions lend each other money on an overnight basis.
    • When the BoC changes the target for the overnight rate, other short-term interest rates also usually change.
    • The BoC establishes a 50 basis point “operating band” for overnight financing. – The Bank Rate is set at the upper limit of the operating band
  • 13. The Overnight Money Market
    • Changes in the operating band indicate an easing or tightening of monetary conditions.
    • Each day, the BoC targets the mid-point of the band.
    • Changes are announced by press release.
  • 14. Operating Band
    • SPRA: BoC lends overnight at the upper limit of the operating band
    • BANK RATE
    • Operating Band: 50 Basis Points or 0.5%
    • (BANK RATE – 0.50%)
    • SRA: BoC sells securities at the lower limit of the operating band
  • 15. Open Market Operations
    • Policy aimed at having a direct impact on the demand for credit in the economy.
    • When would the BoC use a Special Purchase and Resale Agreement (SPRA) and a Sale and Purchase Agreement (SRA)?
  • 16. Open Market Operations
    • Special Purchase and Resale Agreements (SPRAs)
    • When: Overnight money is trading above the target rate
    • Objective: Relieve upward pressure on overnight rates and reinforce the upper limit of the target
    • Why: May dampen economic activity by leading to higher short-term rates across the entire spectrum of market rates
    • How: ?
  • 17. Open Market Operations
    • Special Purchase and Resale Agreements (SPRAs)
    • How:
    • BoC buys short-term government securities from primary dealers
    • The securities are then sold back at a predetermined price the next business day
    • - the BoC lends to a FI overnight at the top end of the target - if a FI has a need to borrow overnight, the preference is to borrow at a lower rate than what is prevailing in the market - the BoC becomes an alternative to borrowing from other lenders - this drives down short-term interest rates back to the target
  • 18. Open Market Operations (continued)
    • Sale and Purchase Agreements (SRAs)
    • When: Overnight money is trading below the target rate
    • Objective: Relieve downward pressure on overnight rates and reinforce the target
    • Why: May lead to lower interest rates throughout the economy and to an increase in inflation pressures in the economy
    • How: ?
  • 19. Open Market Operations (continued)
    • Sale and Purchase Agreements (SRAs)
    • How:
    • BoC offers to sell government securities to primary dealers
    • The securities are bought back at a predetermined price the next day
    • - the BoC borrows from a FI overnight at the bottom of the target - if a FI has a need to lend overnight, the preference is to lend money at a higher rate than what is prevailing in the market - the BoC becomes an alternative by offering higher overnight lending rates - this drives up short-term rates back to the target
  • 20. Changes in the Bank Rate
    • Direct influence, as it sends a message to all market participants
    • Bank rate = Minimum rate of interest that the BoC charges on short-term loans to financial institutions.
    • Set at the upper limit of the Bank’s operating band for the overnight lending rate.

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