If the Canadian economy is operating close to full employment and the U.S.government engages in expansionary fiscal policy,what would the appropriate response of the Canadian authorities be?

Question

Quizplus · Accepted Answer

Expansionary fiscal policy in the US would lead to an increase in demand for Canadian exports, which may lead to inflationary pressures on the Canadian economy. In response to this, the Canadian authorities should implement contractionary monetary policy, such as raising the bank rate, to reduce the aggregate demand and control inflation. Imposing tariffs on US products, buying government securities from the chartered banks, or reducing the GST would not be appropriate responses to this situation.

If the Canadian Economy Is Operating Close to Full Employment