CSC 5

what is a drawdown? what happens to interest rates?

A drawdown refers to the transfer of deposits to the Bank from the chartered banks, effectively draining the supply of available cash balances from the banking system. This decreases deposits and reserves available to the banks to utilize in their business. Removing money from the system causes a contraction in the availability of loans to consumers and businesses, and this places upward pressure on interest rates.

what is a redeposit?

A redeposit is just the opposite, a transfer of funds from the Bank to the chartered banks. This increases deposits and reserves and the availability of funds in the banking system. Adding money to the system places downward pressure on interest and gives banks an incentive to increase loans to consumers and businesses.

supply side economics? compared to monetarist0 same or different? govnt intervention should be through..

According to supply-side economics, to foster an environment of prosperity, the market should be left on its own and government intervention should be held to a minimum. Although there are similarities with the monetarist view, "supply-siders" suggest that government intervention should only occur through changes in tax rates.

what is prime rate and does it follow bank rate

Administered rates such as prime rates (i.e., chartered bank rates to their prime or most creditworthy borrowers) usually follow the trend of the Bank Rate.

t or f changes in overnight band and bank rate now have a press release that explain why it happened

Changes in the overnight band (and therefore, the Bank Rate) are now accompanied by a press release explaining the Bank's actions.

Currently, the overnight rate operates within a __ basis points (or ___ of a percentage point) wide operating band. Each day, the Bank targets the ___ of the operating band as its key monetary policy objective For example, if the operating band is 3% to 3.5%, then the target for the overnight rate is ___.

Currently, the overnight rate operates within a 50 basis points (or one-half of a percentage point) wide operating band. Each day, the Bank targets the mid-point of the operating band as its key monetary policy objective. For example, if the operating band is 3% to 3.5%, then the target for the overnight rate is 3.25%.

target rate for inflation?

Currently, the target range extends from 1% to 3% for inflation

Here is how the Bank keeps inflation within this 1-3 percent range:

Here is how the Bank keeps inflation within this range: • If inflation approaches the top of the target range, this usually indicates that the demand for goods and services is rising too strongly and must be controlled through an increase in short-term interest rates. • If inflation falls towards the bottom of the target range, this usually indicates that economic growth is slowing or weakening and support is needed through a decrease in interest rates.

Over the long run, the rate of inflation is linked to the rate of growth of money and credit. Through its influence over _______, the Bank affects the demand for, and supply of, money and credit.

Over the long run, the rate of inflation is linked to the rate of growth of money and credit. Through its influence over short-term interest rates, the Bank affects the demand for, and supply of, money and credit.

who helps the government deal with debt management? what do they do for the government?

Debt management: The Bank of Canada acts as the federal Government's fiscal agent in its activities in debt management. The planning and arrangements necessary for a new debt issue are major undertakings. Not only must each issue be distributed and sold, arrangements for payments, transfers of funds, etc., must be made. Then there is regular record keeping, payments of interest, transfers of ownership and finally providing funds to repay the issue at maturity.

how is the bank a financial advisor to the government- what does it advise on?

Financial advisor to the Government: The Bank advises the Government on the timing of new federal securities issues. It advises on the price, yield and other special features needed to make them marketable. The Bank also advises the Government about where such securities should be sold (i.e., domestically, in the U.S. or offshore). In order to keep abreast of market developments, the Bank conducts regular discussions with investment dealers, bankers and other investors to obtain views and suggestions.

Financial institutions know that the Bank will always ___ money at the upper end of the band, and ___ money at the lower limit of the band. Thus it makes no sense to trade in the overnight market at rates outside this band.

Financial institutions know that the Bank will always lend money at the upper end of the band, and borrow money at the lower limit of the band. Thus it makes no sense to trade in the overnight market at rates outside this band.

2 parts of fiscal policy

Fiscal policy affects the economy in several ways: spending and taxes

what is fiscal policy- consists of two things..

Fiscal policy is the use of the government's spending and taxation powers to pursue such economic goals as full employment and sustained long-term growth. They do this by spending more and taxing less when the economy is weak, and by spending less and taxing more when the economy is strong.

If overnight money is trading above the target of the operating band, the Bank may believe that the higher rate will dampen economic activity. To combat this, the Bank intervenes and offers to lend at... For example, if the upper limit of the operating band is 4.25% while overnight money trades at 4.50%, it does not make sense for financial institutions to borrow at the higher overnight rate.

If overnight money is trading above the target of the operating band, the Bank may believe that the higher rate will dampen economic activity. To combat this, the Bank intervenes and offers to lend at the upper limit of the operating band. For example, if the upper limit of the operating band is 4.25% while overnight money trades at 4.50%, it does not make sense for financial institutions to borrow at the higher overnight rate. bank would give at 4.25 at a lower rate to help economic activity

If overnight money is trading below the target of the operating band, the Bank may believe that inflationary pressures in the economy will rise. To combat this, the Bank intervenes and offers to For this example, if the lower limit of the operating band is 3.75% while overnight money trades at 3.50%, financial institutions would much prefer the Bank of Canada rate.

If overnight money is trading below the target of the operating band, the Bank may believe that inflationary pressures in the economy will rise. To combat this, the Bank intervenes and offers to borrow at the lower limit of the operating band. For this example, if the lower limit of the operating band is 3.75% while overnight money trades at 3.50%, financial institutions would much prefer the Bank of Canada rate.

If the government predicts a deficit, can the amount projected in the budget differ from what the government actually borrows in the debt market? why or why not? bonds and special purpose funds such as civil service pension fund

If the government predicts a deficit, the amount projected in the budget may differ from what the government actually borrows in the debt market (called its financial requirements) for several reasons: • Previously issued bonds that mature in the coming fiscal year must be refinanced. Since this is not new borrowing, it is usually not included in projected financial requirements. • The government has access to several special-purpose accounts for funds. These alternatives reduce its dependence on debt markets. The most important source of such funds is the civil service pension fund. This is the main reason financial requirements are usually less than the deficit.

The Consequences of Failed Fiscal Policy In the past, governments' failure to address their budget deficits have had several consequences: interest rates? fiscal policy unsynchronized with monetary? In the end, a large national debt constrains the ability of governments to run ...

In the past, governments' failure to address their budget deficits have had several consequences: • Because governments did not eliminate the deficit when it first emerged seriously in the late 1970s and early 1980s, the cost of interest payments on the national debt began to rise rapidly and remained high through the early 1990s. In turn, the interest burden made it difficult for the government to reduce the deficit. It did so by drastically cutting total expenditures, especially transfer payments to the provinces. • Fiscal policy is often unsynchronized with monetary policy, increasing the cost to the economy. For example, in the late 1980s when the economy was growing strongly and inflationary pressure was building, federal and provincial governments in Canada continued to run large deficits. This tended to increase inflationary pressures and led the Bank of Canada to raise interest rates more than would otherwise have been necessary. In turn, the cost of servicing government debts grew and contributed to increased deficits. • In the end, a large national debt constrains the ability of governments to run counter- cyclical fiscal policy. When debts are large, any move to increase the deficit upsets investors, who sell bonds, driving up interest rates. This reaction reduces the beneficial impact on the economy of the increased deficit. When a recession occurs, the government may cut spending and raise taxes to control its growth and, as a consequence, worsen the recession.

Instead of letting it vary from day to day depending on conditions in the market, the Bank aims to keep the overnight rate within its __-basis-point range.

Instead of letting it vary from day to day depending on conditions in the market, the Bank aims to keep the overnight rate within its 50-basis-point range.

Keynesian Theory

Keynesian economics advocates the use of direct government intervention as a means of achieving economic growth and stability.

LVTS participants know that the Bank will always lend money at the __ limit of the band, and will ____ money at the lower limit of the band. Therefore, it does not make sense for financial institutions in the LVTS to borrow or lend outside of the target band.

LVTS participants know that the Bank will always lend money at the upper limit of the band, and will borrow money at the lower limit of the band. Therefore, it does not make sense for financial institutions in the LVTS to borrow or lend outside of the target band.

Monetarist theory how does this compare to keynesian theory? what do monetarist believe the cause of recession and inflation?

Monetarist theory suggests that the economy is inherently stable and, left to its own self- adjusting mechanism, will automatically move to a stable path of growth. In contrast to the Keynesian view, the Monetarist movement, led by American economist Milton Friedman in the late 1950s, held that instability in the money supply is the major cause of fluctuations in real GDP and that rapid money supply growth is the major cause of inflation.

what is monetary policy? Canadian monetary policy strives to protect the value of the Canadian dollar by keeping ___ low and stable. how does monetary policy achieve all this?

Monetary policy sets out to improve the performance of the economy by regulating the growth in money supply and credit. Canadian monetary policy strives to protect the value of the Canadian dollar by keeping inflation low and stable. As Canada's central bank, the Bank of Canada achieves this through its influence over short-term interest rates.

Rational Expectations Theory

Rational expectations theory suggests that firms and workers are rational thinkers and can evaluate all the consequences of a government policy decision, thereby neutralizing the intended impact of the policy. Suppose the government decides to cut taxes temporarily in order to boost consumer spending and improve economic conditions. If consumers behave rationally, they will realize that the tax cut will create a deficit that eventually has to be repaid with higher taxes. Instead of spending the tax cut, they save it to repay future taxes, and the government's move has no impact.

SPRAs work as follows: the bank offers to sell or purchase government securities from primary dealer? what is part of this agreement? when they go through with the deal they give the cash and it acts as a very short... the next day the securities are then ... and the bank receives or gives money?

SPRAs work as follows: • The Bank offers to purchase government securities from a primary dealer (such as a chartered bank) with an agreement to sell them back the next day at a predetermined price. • When the Bank purchases securities from an institution, they pay the institution cash for the securities. Essentially, the cash payment acts as a very short-term loan. • The next day, when the securities are resold to the institution, the Bank receives money in exchange for the securities they are returning.

the bank offers to sell or purchase government securities from primary dealer? what is part of this agreement? when they go through with the deal they give the cash and it acts as a very short... the next day the securities are then ... and the bank receives or gives money?

SRAs work as follows: • The Bank offers to sell government securities to chartered banks with an agreement to repurchase them the next day at a predetermined price. • In exchange for the sale, the Bank receives money. Essentially, the Bank is borrowing money from the Chartered Bank when it sells securities under this program. • The next day, the Bank repurchases those securities in exchange for the cash. In effect, the money they borrowed is paid back.

Sale and Repurchase Agreements (SRAs) are used to offset undesired ____ pressure on overnight financing costs. used when money is trading above or below the target on the operating band

Sale and Repurchase Agreements (SRAs) are used to offset undesired downward pressure on overnight financing costs. If overnight money is trading below the target of the operating band, the Bank may believe that inflationary pressures in the economy will rise.

Special Purchase and Resale Agreements (commonly referred to as SPRAs or "Specials") are used by the Bank of Canada to relieve ___ pressure on overnight financing rates. used when money is trading above or below the target on the operating band

Special Purchase and Resale Agreements (commonly referred to as SPRAs or "Specials") are used by the Bank of Canada to relieve undesired upward pressure on overnight financing rates. used when money is trading above the target on the operating band

The two main open market operations that the Bank uses to conduct monetary policy are

Special Purchase and Resale Agreements and Sale and Repurchase Agreements.

taxes... The amount of tax collected may vary because... Raising tax rates ___ the disposable income of consumers, thereby ____ their spending. The main types of taxes are: direct taxes: sales taxes: payroll taxes: capital taxes: property taxes: explain how taxes discourage.. Income taxes ___ the incentive to work and earn; payroll taxes ___ the incentive to hire; and sales taxes ___ the incentive to spend.

Taxes: The amount of tax collected may vary because the size of the tax base changed, i.e., the number of people or companies paying the tax expanded or contracted. Also, it can vary because the tax rate changed, so that each dollar of economic activity yields more or less tax. Raising tax rates reduces the disposable income of consumers, thereby dampening their spending. The main types of taxes are: - Direct taxes, levied on the income of individuals and companies; - Sales taxes (including value-added taxes, like the goods and services tax, and excise taxes, such as on liquor); - Payroll taxes, levied as a share of wages; - Capital taxes, levied on the size of a company's assets or capital; - Property taxes, levied on residential and commercial property. All taxes tend to discourage the type of activity being taxed. Income taxes reduce the incentive to work and earn; payroll taxes reduce the incentive to hire; and sales taxes reduce the incentive to spend.

does the bank of canada act explain how the bank of canada should go about fulfilling its role how do the policies of the bank of Canada change- the thrust of policy is the ultimate responsibility of the..

The Act does not specify the manner in which the Bank should pursue these objectives but it (and other legislation) grants powers to the Bank which are designed to enable it to fulfill its role. While the Bank administers policy independently without day-to-day Government intervention, the thrust of policy is the ultimate responsibility of the elected Government.

what is the bank rate? where is the bank rate on the operating band? Continuing with our example from above, with an operating target range of between 3% and 3.5%, the Bank Rate is ___%. The Bank is accordingly known as the banking system's lender of....

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) in its role as lender of last resort. the Bank Rate is the upper limit of the operating band. Continuing with our example from above, with an operating target range of between 3% and 3.5%, the Bank Rate is 3.5%. The Bank is accordingly known as the banking system's lender of last resort.

does the bank of canada buy and sell gold- is it still important?

The Bank acts as a depository for gold held by the Exchange Fund Account. It also buys and sells gold. This activity has diminished importance reflecting the marginal role of gold in securing the value of the Canadian dollar.

The Bank of Canada Act empowers the Bank to: • Buy and sell __, silver and foreign exchange; • Maintain deposits with... • Act as agent and depository for central banks and certain international institutions.

The Bank of Canada Act empowers the Bank to: • Buy and sell gold, silver and foreign exchange; • Maintain deposits with other central banks and commercial banks inside and outside Canada; and • Act as agent and depository for central banks and certain international institutions.

The Bank of Canada carries out monetary policy primarily through changes to what it calls the Target for the _____ Rate.

The Bank of Canada carries out monetary policy primarily through changes to what it calls the Target for the Overnight Rate.

who else is responsible for debt management programs? what are government 2 principal categories of debt?

The Minister of Finance is responsible for debt management programs but relies on the Bank for advice and implementation of policy. While there is a wide range of maturities in Government debt, there are two principal categories of debt: marketable (treasury bills and marketable bonds) and non-marketable (Canada Savings Bonds and Canada Premium Bonds). These securities are discussed in the material on fixed-income products.

what is the most important number in the budget?

The amount of the surplus or deficit is the most important number in the budget

what is the federal budget? The government's budget balance is equal to its ___ less its total ____.

The budget contains projections for the coming year, and usually for at least one subsequent year, for spending, revenue, the amount of the projected surplus or deficit, and debt. The government's budget balance is equal to its revenues less its total spending.

The duties and role of the Bank are stated in a general way in the preamble of the BANK OF CANADA Act: • "To regulate credit and currency in the best interests of the economic life of the nation... • To control and protect the external value of the national monetary unit... • To mitigate by its influence fluctuations in the general level of production, trade, prices and employment, as far as may be possible within the scope of monetary action and generally... • To promote the economic and financial welfare of the Dominion."

The duties and role of the Bank are stated in a general way in the preamble of the Bank of Canada Act: • "To regulate credit and currency in the best interests of the economic life of the nation... • To control and protect the external value of the national monetary unit... • To mitigate by its influence fluctuations in the general level of production, trade, prices and employment, as far as may be possible within the scope of monetary action and generally... • To promote the economic and financial welfare of the Dominion."

what is the federal govnt responsible for? what is provincial govtn responsible for? employment insurance, health, defence, old age security, education, veterans' affairs and native affairs, welfare do they ever overlap responsibility? A large segment of federal government spending consists of transfer payments to ...

The federal government is responsible for such things as employment insurance, defence, old age security, veterans' affairs and native affairs. The provincial governments are responsible for health, education and welfare. However, the federal government shares some responsibility for those areas with the provinces. A large segment of its spending consists of transfer payments to the provincial governments to pay for health, education and welfare. At times, federal deficit reduction efforts result in cuts to these transfers, putting upward pressure on provincial deficits, since the provinces have little other revenue to compensate for the loss of transfers.

what is the goal of monetary policy?

The goal of monetary policy is to preserve the value of money by promoting sustained economic growth with price stability PRETTY MUCH TO KEEP INFLATION AT CONTROLLED LEVELS

is monetary policy instant? monetary is forward looking, lagging, or coincident looking? Thus, the Bank conducts monetary policy by consistently aiming their efforts at the ___ of the target range

The influence of monetary policy on total spending is exerted indirectly and with some time lag - roughly one to two years. Monetary policy must therefore be forward looking. Thus, the Bank conducts monetary policy by consistently aiming their efforts at the midpoint of the target range. That is, by aiming for an inflation rate of 2% over the next 12-month period, the Bank believes it can achieve its inflation-control targets.

The major functions of the Bank of Canada are: • To act for the Government in the issuance and removal of bank notes; • To act as the Government's fiscal agent (i.e., being the Government's financial advisor on debt management, foreign exchange and monetary policy and acting as its agent in financial transactions); and • To conduct monetary policy (i.e., managing the supply of the nation's money). which one is the banks most important function?

The major functions of the Bank of Canada are: • To act for the Government in the issuance and removal of bank notes; • To act as the Government's fiscal agent (i.e., being the Government's financial advisor on debt management, foreign exchange and monetary policy and acting as its agent in financial transactions); and • To conduct monetary policy (i.e., managing the supply of the nation's money). This is the Bank's most important function.

what is the overnight rate? When the Bank changes the target for the overnight rate, what else changes?

The overnight rate is the interest rate set in the overnight market - a marketplace where major Canadian financial institutions lend each other money on an overnight basis. When the Bank changes the target for the overnight rate, other short-term interest rates also usually change.

This operation is used to reinforce lower the limit or floor of the operating band and is the focus of considerable market attention. lend when it is above or below the upper rate- so u lend at lower interest buy when it is above or below the lower rate- so u buy at higher interest

This operation is used to reinforce lower the limit or floor of the operating band and is the focus of considerable market attention. lend when it is above the upper rate- so u lend at lower interest buy when it is below the lower rate- so u buy at higher interest

Large Value Transfer System (LVTS)?

This system allows participating financial institutions to conduct large transactions with each other through an electronic wire system. Among other things, this system permits these financial institutions to track their LVTS receipts and payments electronically throughout the day and to know the net outcome of these flows by the end of the day (same day settlement).

two attitudes about govnt intervention=

Two attitudes are widespread. The first emphasizes that the economy may be slow to react. As a consequence, interventionist policy may not be effective or even essential in guiding the economy in the right direction. The alternative view emphasizes that the economy makes its way quickly to its natural equilibrium, and that no need exists for policy other than to constrain policy.

can the bank of canada transfer funds from govnt account to chartered banks? WHY WOULD THEY DO THIS?

the Bank of Canada can transfer funds from the government's account at the Bank to its account at the chartered banks or from the government's account at the chartered banks to its account at the Bank of Canada. This strategy is used to influence short-term interest rates and is achieved using drawdowns or redeposits.

As fiscal agent to the Government, the Bank has a variety of functions. The Bank administers the Government's deposit accounts and funds. This includes: Almost all of the Government's Canadian dollar receipts and expenditures flow through which account? who handles the governments foreign currency reserves?

• Deposit accounts with the Bank of Canada and the chartered banks in which Government cash is held; and • The Exchange Fund Account, which holds the Government's foreign exchange reserves. Almost all of the Government's Canadian dollar receipts and expenditures flow through the account it maintains at the Bank of Canada. The Bank manages Canada's official international currency reserves. It operates for the Government in foreign exchange markets in keeping with its mandate "to control and protect the external value of the national monetary unit."

what is a budget surplus? budget defect? what is a balanced budget? When the government runs a budget deficit, what must the govnt do? what is the national debt? It is the sum of past ___ minus the sum of past ____.

• If the revenue collected during the year exceeds spending for the year, the government has a budget surplus. • If total spending for the year is higher than the revenue collected, the government has a budget deficit for the year. • Accordingly, if the revenue collected for the year equals total spending, the government has a balanced budget. When the government runs a budget deficit, it must borrow to make up the difference by selling government bonds and Treasury bills into the market. The accumulation of total government borrowing over time is referred to as the government debt or the national debt. It is the sum of past deficits minus the sum of past surpluses.

spending... What type of spending is recorded in GDP

• Spending: Governments can purchase goods or services themselves, such as a new highway, thereby boosting economic activity. Or they can simply transfer money to citizens to spend or save themselves, such as with social security cheques. Only the first type is recorded as government spending in GDP.