Rational Expectatio: rational thinkers and evaluate the consequencs of a
government policy decision Government cuts taxes to boos spending, if consumers are rational they will save to pay more for higher future taxes Evaluate the government intentions and negate it Keynesian theory: direct government intervention as a means of acheviing economic growth and stablitiy Increase spending and lower taxes during recession Monetarist theory: economy is inherently stable and left to its own self adjusting mechanism, instability in the money supply is the major cause of inflation Let money supply equal to the economys long run growth rate, controlling inflation as the main policy goal creates a foundation for the economy to grow at optimal rate Supply side economics: market should be left on its own and government intervention minimum, FISCAL POLICY Government powers to tax and spend to hit economic goals like full employment Both provincial and federal, federal is responsible for employment insurance, defence old age, security, veterans affairs Provincial governemnts: health, education and welfare Some are similar, transfer payments to the priovincial from federal to pay for health, education and welfare Federal budget Usually in feberary, finance minister presents fiscal year april 1 st to march 31st Budget balance is to equal its revenues less total spending, revenue collected for the year to balance If a government predicts a deficit the amount projected n the budget may differ from what the government actually borrows Fiscal policy Affects spending: highways, goods and services. Taxes: direct taxes, sales taxes etc. Monetary: exchange rates, interest and money supply Fiscal: taxation and spending
Role of bank of Canada
1. Regulate credit and currency in the best interest of economic life of nation 2. Control and protect the external value of national monetary unit 3. Mitigate by its influence in fluctuations of production Does not specifiy manner by which pursue objectives, it administers policy independent of day to day government interventions Fluctiatons of the bank of Canada Act for the government to issue and remove bank notes Act as fiscal agent ex. Advise government Administer deposit accounts and funds, accounts with the BOC and chartered bank Advises on price, yield and other features to make federal securities marketable Conduct monetary policy Bank of Canada act empowers bank to: buy sell gold or foreign exchange, maintain deposits with other banks Debt management: new debt issues and major undertakings. Minister of finance is responsbiel for debt management programs but relies on the bank for advice and implementatopm Monetary Policy -. Improve performance of the economy by regulating the growth in mully supply and gredit, to ensure money can play a vitral role -. Preserve the value fo money by promiting sustained economic growth with price stability -if inflation approaches the top of the target ranges this sually indicates the demand of goods is rishing and interest rates rise and vice versa -in the long run, inflation is linked to the rate of growth of money and credit, through its influence over short term and long term rates Implementation -. Overnight rate: a marketplace where major financial isntituions lend each other money nightly *currently 60 basis or half a percent, each day it sets it between say 5% and 5.5% -Bank rate: minimum rate at which the bank of Canada will lend money on a short term rate, similar to target overnight rate Open market operations
-. Special purchase and resale agreements: to relive undesired upward
pressure on overnight financing Ex: if upper limit of the operating band is 4.25 while overnight trades at 4.5, it does not make sense for institutions to borrow at at the higher overnight rate -offers to purchase government securities from a primary dealer to sell them back at a predetermined price -when bank purcahses from instituitions they pay the institution cash for the securities -next day, bank receives money in exchange for the securties returning -sale and repurchase agreement: used to offset undesired downward pressure on overnight financing costs, if lower limit is 3.75 while overnight is 3.5 financial instituions would prefer BOC rate -bank sells government securities to chartgered banks with an agreement to repurchase -bank is borrowing money form chartered bank when it sells securities -this is to reinforce the lower the limit or floor the operating hand -bank will always lend at upper and borrow at lower, makes no sense to trade in overnight market rates outside this band Drawdowns and redposits: the bank of Canada can transfer finds from the governemnts account at the bank to its account at the chartered banks or from the government accounts, this is to influence short term interest rates -drawdown: transfer of deposits to the bank from chartered bank, draining supply of cash balances, depcreases deposits and reserves, increase interest rates -redposit: opposite Failed policy -. Ecnomy slow to react to plocy changes, may not be effective -no need because of natural equilibrium -interest payments big expenditure 6+66666666666666666666666669565996++9+9----------*-9///////////////////8*885563