Suppose Canadian real GDP is equal to potential GDP.A significant and sustained appreciation of the Canadian dollar would likely lead the Bank to engage in an expansionary monetary policy if the Bank's policy experts traced the cause of the appreciation to

Question

Quizplus · Accepted Answer

An increase in the desire of non-residents to purchase Canadian financial assets would result in an increase in the demand for Canadian dollars, which would appreciate the currency. This appreciation would make Canadian exports more expensive and thus decrease the demand for Canadian goods and services, potentially leading to a decrease in real GDP below potential. To counteract this, the Bank might engage in expansionary monetary policy, such as decreasing the overnight lending rate, to stimulate economic growth and maintain real GDP at potential.

Suppose Canadian Real GDP Is Equal to Potential GDP