If the Bank of Canada pursues an expansionary monetary policy,

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Quizplus · Accepted Answer

When the Bank of Canada pursues an expansionary monetary policy, they will decrease interest rates, which will decrease the return on assets denominated in Canadian dollars. As a result, investors will sell these assets and buy assets denominated in currencies with higher interest rates, leading to a capital outflow from Canada. Additionally, the decrease in interest rates will make borrowing cheaper, leading to an increase in domestic spending and potentially increasing imported goods and services, which will lead to a trade deficit. A capital outflow and a trade deficit will both put downward pressure on the value of the Canadian dollar. Therefore, the Canadian dollar will depreciate.

If the Bank of Canada Pursues an Expansionary Monetary Policy