Explore the essential glossary terms related to economic policy, including fiscal and monetary policy, inflation, unemployment, and more, with a focus on the Canadian financial landscape.
Understanding economic policy is crucial for anyone involved in the financial sector, particularly in Canada. This glossary provides clear definitions and explanations of key terms related to economic policy, helping you grasp the concepts that influence financial markets and economic conditions. Let’s delve into these terms and explore their significance in the Canadian context.
A balanced budget occurs when a government’s revenues are equal to its expenditures. This is a key goal for many governments as it indicates fiscal responsibility and sustainability. In Canada, achieving a balanced budget can be challenging due to fluctuating economic conditions and the need for public services.
A budget deficit arises when government expenditures exceed revenues. This situation often requires borrowing to cover the shortfall, leading to increased national debt. In Canada, budget deficits can result from economic downturns or increased spending on social programs.
Conversely, a budget surplus occurs when government revenues exceed expenditures. Surpluses can be used to pay down debt, invest in infrastructure, or save for future economic challenges. Canada has experienced budget surpluses in the past, which have been used to strengthen the country’s fiscal position.
The bank rate is the interest rate charged by the Bank of Canada to financial institutions for short-term loans. This rate influences other interest rates in the economy, affecting borrowing costs for businesses and consumers. The Bank of Canada uses the bank rate as a tool to implement monetary policy.
Basis points are a unit of measure equal to one hundredth of a percentage point (0.01%). They are commonly used in finance to describe changes in interest rates or yields. For example, an interest rate increase of 25 basis points means a 0.25% rise.
Consumer spending refers to expenditures by households on goods and services. It is a major component of GDP and a key indicator of economic health. In Canada, consumer spending is influenced by factors such as income levels, interest rates, and consumer confidence.
Crowding out occurs when increased government borrowing leads to a reduction in private sector investment. This can happen because government borrowing raises interest rates, making it more expensive for businesses to finance new projects. In Canada, crowding out can be a concern when the government runs large deficits.
A deficit is a reduction in the amount of money, assets, or other resources. In the context of government finance, it refers to the shortfall between revenues and expenditures. Deficits can lead to increased borrowing and higher national debt.
Disinflation is a decrease in the rate of inflation. It indicates that prices are still rising, but at a slower pace. Disinflation can be beneficial if it leads to stable prices without causing deflation, which is a general decline in prices.
Drawdown refers to the transfer of funds from financial institutions to the Bank of Canada, reducing the money supply. This is a monetary policy tool used to control inflation and stabilize the currency.
A fiscal agent is an institution appointed to carry out certain financial activities on behalf of the government. In Canada, the Bank of Canada often acts as the fiscal agent, managing the government’s debt and foreign exchange reserves.
Fiscal policy involves government decisions regarding taxation and spending to influence economic conditions. In Canada, fiscal policy is used to promote economic growth, reduce unemployment, and control inflation.
Frictional unemployment is short-term unemployment arising from the process of matching workers with jobs. It occurs when people are temporarily between jobs or entering the workforce for the first time.
An interest rate premium is the additional interest rate charged to compensate for higher risk or inflation. It reflects the lender’s assessment of the borrower’s creditworthiness and the expected inflation rate.
Inflation is the rate at which the general level of prices for goods and services is rising. In Canada, the Bank of Canada aims to keep inflation within a target range to ensure price stability and economic growth.
Investment capital refers to funds used by businesses and governments to finance their operations and investments. In Canada, investment capital is crucial for economic development and job creation.
The Large Value Transfer System (LVTS) is an electronic system for processing large-value payments between financial institutions in Canada. It ensures the efficient and secure transfer of funds, supporting the stability of the financial system.
Monetary policy involves central bank actions to control the money supply and interest rates to achieve economic goals. In Canada, the Bank of Canada uses monetary policy to manage inflation and support economic growth.
The monetary supply is the total amount of money available in the economy. It includes cash, deposits, and other liquid assets. The Bank of Canada monitors the money supply to ensure economic stability.
The natural unemployment rate is the unemployment rate that exists when the economy is at full employment. It consists of frictional and structural unemployment and reflects the normal turnover in the labor market.
The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (overnight) funds among themselves. The Bank of Canada sets a target for the overnight rate as part of its monetary policy.
Overnight reverse repos (SRAs) are transactions where the Bank of Canada sells securities and agrees to repurchase them, withdrawing liquidity from the financial system. This helps control inflation and stabilize the currency.
Overnight repos (SPRAs) are transactions where the Bank of Canada buys securities and agrees to resell them, injecting liquidity into the financial system. This supports economic growth by lowering borrowing costs.
The Phillips Curve is a theory that depicts an inverse relationship between unemployment and inflation. It suggests that lower unemployment leads to higher inflation and vice versa.
Redeposit refers to the transfer of funds from the Bank of Canada to financial institutions, increasing the money supply. This is a tool used to stimulate economic activity.
Revenue is income generated, especially by the government through taxation. It is used to fund public services and infrastructure projects.
Real GDP is GDP adjusted for changes in the price level, reflecting the true value of goods and services produced. It is a key indicator of economic performance.
A SPRA is an operation where the Bank of Canada purchases securities to inject liquidity into the financial system. This helps lower interest rates and stimulate economic growth.
An SRA is an operation where the Bank of Canada sells securities to withdraw liquidity from the financial system. This helps control inflation by raising interest rates.
A surplus is an excess of revenue over expenditure. It indicates a strong fiscal position and provides resources for future investments or debt reduction.
The target for the overnight rate is the Bank of Canada’s benchmark interest rate for overnight lending. It influences other interest rates in the economy and is a key tool for monetary policy.
Temporary expansionary policy involves government actions to increase expenditure or reduce taxes to stimulate economic growth. It is often used during economic downturns to boost demand and reduce unemployment.
Temporary contractionary policy involves government actions to decrease expenditure or increase taxes to cool down economic growth. It is used to prevent overheating and control inflation.
Transaction costs are the costs associated with buying or selling assets. They include fees, commissions, and other expenses that can affect investment returns.
The unemployment rate is the percentage of the labor force that is unemployed and actively seeking employment. It is a key indicator of economic health and labor market conditions.
The velocity of money is the rate at which money circulates through the economy. It reflects the frequency of transactions and can influence inflation and economic growth.
Withdrawal of liquidity is the process of removing money from the financial system to control inflation or stabilize the currency. It is achieved through monetary policy tools such as SRAs.
The term “withdrawal of spark” is not a standard financial term and may refer to the withdrawal of liquidity. Context is needed to provide a precise definition.
Practice 10 Essential CSC Exam Questions to Master Your Certification