Suppose the Canadian economy is producing at the natural rate of output. A depreciation of the Canadian dollar will cause ________ in real GDP in the short run and ________ in the inflation rate in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

Question

Quizplus · Accepted Answer

A depreciation of the Canadian dollar will cause an increase in net exports, which will increase aggregate demand and lead to an increase in real GDP in the short run. At the same time, the depreciation will cause an increase in the prices of imported goods, which will increase the inflation rate in the short run. Therefore, the correct answer is A) an increase; an increase.

Suppose the Canadian Economy Is Producing at the Natural Rate