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

If the appreciation of the Canadian dollar is caused by an increase in the desire of non-residents to purchase Canadian financial assets, it implies a capital inflow to Canada, which increases the demand for Canadian dollars and leads to an appreciation of the currency. This, in turn, makes Canadian exports more expensive and less competitive in the global market, leading to a decline in aggregate demand and potentially a slowdown in economic growth. To counter this, the Bank might engage in an expansionary monetary policy by lowering interest rates to stimulate domestic demand and offset the negative impact of the currency appreciation.

Suppose Canadian Real GDP Is Equal to Potential GDP