Fiscal and Monetary Policy in Canada

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Questions and Answers

What is the primary aim of increasing government spending in the context of fiscal policy?

To decrease aggregate demand

To stimulate the economy in the short run (correct)

To reduce the government's budget deficit

To increase tax revenues immediately

Which of the following outcomes is likely from an increase in personal income tax levels?

Increase in business expansion

Increase in disposable income

Decrease in consumer spending (correct)

Decrease in government revenue

What effect do corporate tax reductions have on businesses?

Increased regulatory compliance costs

Higher spending on employee training

Immediate increase in profits and dividends (correct)

Reduced incentives for investment

What factor can limit the effectiveness of fiscal policy?

The lengthy time lag for parliamentary approval of legislation Signup and view all the answers

How can governments target specific sectors of the economy through fiscal policy?

By providing tax incentives for designated industries Signup and view all the answers

What characterizes expansionary fiscal policies?

Tax cuts combined with government spending initiatives Signup and view all the answers

What is the primary role of the Bank of Canada?

To promote Canada’s economic and financial welfare Signup and view all the answers

How do high levels of government debt impact fiscal policy options?

They restrict the flexibility of fiscal and monetary policy. Signup and view all the answers

Which action might the Bank of Canada take if the economy is showing signs of a slowdown?

Reduce short-term interest rates Signup and view all the answers

What typically happens to bond yields during periods of accelerating economic growth?

Bond yields tend to rise Signup and view all the answers

What is a likely effect of measures encouraging individual savings like retirement accounts?

Increases the availability of cash for investments Signup and view all the answers

What impact does the Bank of Canada aim for by keeping inflation low and stable?

To promote steady prices for goods and services Signup and view all the answers

What are the consequences of a government with high levels of consumer indebtedness?

Reduced capability to lower taxes or increase spending Signup and view all the answers

What effect do changes in monetary policy have on securities prices?

They affect interest rates and corporate profits Signup and view all the answers

What might an unusually high dividend payout rate indicate about a company's earnings?

Stable earnings that support a high payout Signup and view all the answers

Which factor is least likely to contribute to a low dividend payout rate?

A company policy focusing on increasing dividend payouts Signup and view all the answers

How does low interest coverage influence a company's dividend policy?

It restricts the company's dividend policy Signup and view all the answers

What aspect of a company's financial situation is directly revealed by analyzing its capital structure?

The amount of debt utilized in operations Signup and view all the answers

Which scenario illustrates a potential risk related to convertible securities in a company's capital structure?

Dilution of earnings per common share (EPS) Signup and view all the answers

Which factor is likely to indicate a future increase in dividends?

Stable and growing earnings Signup and view all the answers

What is the primary factor that distinguishes cyclical industries from others?

Their sensitivity to global economic conditions and commodity prices Signup and view all the answers

Which of the following best describes the group of industries categorized as 'industrial cyclical'?

Transportation and capital goods Signup and view all the answers

How does a declining Canadian dollar typically impact cyclical industries?

It enhances their competitiveness in international markets Signup and view all the answers

What type of industries are classified as 'consumer cyclical'?

Merchandising and automobile industries Signup and view all the answers

In which situation are earnings of cyclical industries most likely to rise dramatically?

Following improvements in business conditions Signup and view all the answers

Which of the following industries is NOT typically categorized as cyclical?

Pharmaceuticals Signup and view all the answers

What characteristic is most commonly associated with commodity basic cyclical industries?

High sensitivity to international commodity prices Signup and view all the answers

What primary factor influences the profitability of cyclical Canadian companies?

The state of the U.S. business cycle Signup and view all the answers

Which of the following best describes the overall impact of an adverse economic downturn on cyclical industries?

They typically face pronounced declines in earnings Signup and view all the answers

What is a key feature of defensive industries in relation to economic cycles?

They are generally less sensitive to economic fluctuations Signup and view all the answers

Study Notes

Fiscal Policy Impact

The Canadian government utilizes two primary fiscal policy tools: government spending and taxation.
Government spending impacts aggregate spending in the economy by increasing or decreasing allocations toward goods, services, and capital programs.
Changes in tax levels can alter the spending power of individuals and businesses.
Increased sales or personal income taxes reduce disposable income, limiting consumer spending. Conversely, tax reductions boost consumer spending.
The effectiveness of fiscal policy can be limited by factors like the time lag needed for parliamentary approval of tax legislation and the delay between fiscal action and its economic impact.

Monetary Policy Impact

The Bank of Canada's primary role is to promote the nation's economic and financial well-being through monetary policy, aiming to preserve the Canadian dollar's value by maintaining low, stable, and predictable inflation.
During periods of economic expansion, increased demand for credit and rising prices can lead to inflationary pressures. The Bank may try to curb this by raising short-term interest rates.
In times of economic slowdown, the Bank may increase the money supply and credit availability by lowering short-term interest rates.
Monetary policy influences interest rates and corporate profits, which significantly affect securities prices.

Capital Structure

A company's capital structure refers to the combination of debt and equity that makes up its finances.
Analyzing a company's capital structure provides insights into its financial soundness, revealing the amount of debt used in its operations. This analysis may indicate the need for future financing as well as the type of security that might be appropriate.

Classifying Industries by Reaction to the Economic Cycle

Cyclical industries are industries in which earnings are most significantly affected by the overall business cycle.
Examples of cyclical industries: commodity basic cyclical (forest products, base metals, chemicals), industrial cyclical (transportation, capital goods), and consumer cyclical (merchandising, automobiles).
The energy and gold industries are also cyclical but exhibit slightly different patterns.
Cyclical Canadian companies often benefit from a weaker Canadian dollar, as their exportable products become more affordable for international buyers.

Analyzing Statement of Financial Position

A thorough analysis of the statement of financial position helps understand a company's overall financial situation, revealing important aspects of its operations and factors that may affect its earnings.
Company analysis should address external comparisons, which involve comparing a company's financial performance with others in the same or similar industries.

Analyzing Financial Ratios

Liquidity ratios are crucial for assessing a company's capability to meet its short-term liabilities.

Dividend Payout Ratio

A high dividend payout ratio (over 65%) may signify stable earnings, declining earnings, or earnings from depleting resources.
A low dividend payout ratio can indicate earnings reinvested in a growth company, growing earnings, cyclical earnings at their peak, or a company policy of share buybacks instead of dividend payouts.

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Description

Explore the impact of fiscal and monetary policies in Canada, focusing on government spending, taxation, and the role of the Bank of Canada. Understand how these policies affect consumer behavior and the economy. Assess the challenges in implementing effective fiscal measures.