Suppose Canadian real GDP is currently equal to potential GDP.Then the Canadian dollar depreciates due to the reduced demand by European producers to purchase Canadian-made raw materials.If the Bank of Canada is committed to its inflation target then it should

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When the Canadian dollar depreciates, it makes Canadian goods cheaper for foreign buyers, potentially increasing exports. However, if the depreciation is due to reduced demand for Canadian-made raw materials, it could signal a decrease in economic activity. To combat potential negative effects on the economy and to ensure inflation remains on target, the Bank of Canada might lower the overnight interest rate. This expansionary monetary policy can stimulate economic activity by making borrowing cheaper, encouraging spending and investment.

Suppose Canadian Real GDP Is Currently Equal to Potential GDP