If the Bank of Canada lowers the overnight loans rate, the exchange rate _______, and net exports _______.

Question

Quizplus · Accepted Answer

When the Bank of Canada lowers the overnight loans rate, it becomes cheaper for commercial banks to borrow money from the Bank of Canada. This leads to an increase in the money supply, which in turn leads to a fall in interest rates. Lower interest rates make Canadian assets less attractive to foreign investors, causing a decrease in the exchange rate. A lower exchange rate makes Canadian exports cheaper and foreign imports more expensive, which increases net exports.

If the Bank of Canada Lowers the Overnight Loans Rate