MACRO CHP 7,8,9

CHAPTER 7: Fiscal Policy

Learning Objectives

  • Understand the federal government’s budget dependencies:

    • Rate of taxation

    • Size of GDP

    • Government spending levels

  • Analyze pros and cons of budget policies:

    • Aim at full-employment equilibrium

    • Aim at achieving a balanced budget annually

  • Examine policies achieving both full employment and balanced budget over business cycles.

  • Discuss causes, size, and problems associated with national debt.

Overview of Fiscal Policy

  • Fiscal Policy: Government's strategy regarding its spending and taxation

  • Annual budget presented by the Minister of Finance includes estimates of revenue and expenditures for the upcoming fiscal year.

Federal Budget Overview (FY Ending March 2023)

  • Total Revenues: $408.4 billion

    • Personal Income Taxes: $197.3 billion

    • Corporate and Other Income Taxes: $79.3 billion

    • GST, Excise, and Energy Taxes: $65.3 billion

    • EI Premiums: $25.8 billion

    • Other Revenues: $40.7 billion

  • Total Expenses: $461.2 billion

    • Transfers to Persons: $125.1 billion

    • Spending Grants to Other Governments: $90 billion

    • Direct Program Spending: $210.3 billion

    • Public Debt Charges & Actuarial Losses: $35.8 billion

  • Budget Deficit: $52.8 billion

Budget Components

  • Net Tax Revenue (NTR): Total tax revenue minus transfer payments

  • Budget Balance: Difference between net tax revenues and government spending, calculated as:

    • NTR = Tax Revenue - Transfer Payments

    • Budget Balance = NTR - G (Government Spending)

  • Budget Surplus: When net tax revenue exceeds government spending.

  • Budget Deficit: When government spending exceeds net tax revenue.

  • National Debt: Accumulation of federal government’s annual budget deficits minus surpluses.

  • Balanced Budget: Occurs when net tax revenues equal government spending during a defined period.

Government Budget Dynamics

  • Factors affecting government budget:

    • Changes in GDP level

    • Changes in tax rates

    • Changes in spending levels

  • Countercyclical Fiscal Policy:

    • Action in times of economic fluctuation: overspending in recession, underspending during booms.

    • Aims at maintaining full employment and stable prices.

  • Balanced Budget Fiscal Policy: Focuses on annual budget balance, potential for increased unemployment or inflation.

  • Cyclically Balanced Budget Policy: Balancing budget over the business cycle, running deficits during downturns and surpluses during growth.

Monetary Policy and National Debt

  • Monetary Policy: Management of money supply and interest rates to achieve economic objectives.

  • Bank of Canada: Manages currency issuance, regulates supply, and acts as lender of last resort.

  • Criticism of National Debt:

    • High debt results in burdensome interest payments.

    • Concerns over government efficacy and ability to cater to citizen needs.

Key Takeaways

  • Understand complexities of fiscal policy and its direct impact on macroeconomic stability.

  • Be aware of the pros and cons of approaches to achieving balanced budgets, full employment, and addressing national debt.

CHAPTER 8: Money and Banking

Learning Objectives

  • Explain the functions, characteristics, and history of money.

  • Define what constitutes money and outline banks' roles as moneylenders.

  • Explore how limited cash can support extensive loans to create money.

Functions of Money

  1. Medium of Exchange:

    • Facilitates trading and avoids barter system complexities.

  2. Store of Wealth:

    • Allows for wealth accumulation.

  3. Unit of Account:

    • Provides means to value goods, record debts, and perform calculations.

Characteristics of Money

  • Widely accepted, durable, portable, divisible, standardized, and regulated by authority.

Evolution of Money

  • Barter System: Goods traded directly; focuses on widely valued items as commodity money (e.g., gold).

  • Coins: Introduced standardization; issues with currency debasement led to inflation concerns.

  • Paper Money: Emerged from certificates, allowed for easier transactions and eventual governmental control.

  • Modern Banking: Banks emerged as money creators through fractional reserve banking, retaining a fraction of deposits while loaning out excess.

Types of Money

  • Commodity Money: Early forms based on valuable items.

  • Fiat Money: Government-issued currency without inherent value but declared as legal tender.

  • Digital Money: Evolution towards modern transactions, including cryptocurrencies.

Investment Concepts

  • Understand the nature of bank loans, deposits, and the creation of money via fractional reserve banking. Recognize the importance of the multiplier effect in the banking system.

CHAPTER 9: Money Market and Monetary Policy

Learning Objectives

  • Analyze money market dynamics and monetary policy targets.

  • Explore how the Bank of Canada manages money supply and interest rates.

  • Present the monetary transmission process impacting real economic variables.

Interest Rates in Money Market

  • Defined as the cost of borrowing funds and influenced by Bank of Canada's operations.

Demand for Money

  • Transactions Demand: Related to transaction activity, independent of interest rates.

  • Asset Demand: Holds a direct relation to interest rates, with increases in rates reducing the demand for money.

Monetary Transmission Process

  • Changes in money supply influence interest rates, investment levels, aggregate expenditures, and ultimately GDP growth and inflation.

Anti-Inflationary Monetary Policy

  • Bank of Canada's strategy to maintain low and stable inflation, ensure economic health.

  • Shift in monetary policy strategies may lead to benefits and challenges, including criticism regarding economic growth and employment levels.

Final Considerations

  • Comprehensive understanding of fiscal and monetary policies is crucial to grasp macroeconomic principles and effects on the economy.