Suppose Canadian real GDP is equal to potential GDP. An appreciation of the Canadian dollar then implies that the Bank of Canada should engage in

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An appreciation of the Canadian dollar could be caused by a variety of factors, such as an increase in foreign investment or a decrease in demand for Canadian exports. Therefore, the appropriate monetary policy response would depend on the specific cause of the appreciation. If it is due to increased foreign investment, for example, the Bank of Canada may want to adopt a contractionary policy to prevent inflationary pressures. If the appreciation is due to decreased demand for Canadian exports, however, the Bank of Canada may want to adopt an expansionary policy to stimulate the economy. Therefore, there is no one-size-fits-all response to an appreciation of the Canadian dollar.

Suppose Canadian Real GDP Is Equal to Potential GDP