All else equal, a contractionary fiscal policy in Canada which reduces domestic interest rates tends to:
A)increase Canadian imports.
B)increase the international value of the dollar.
C)reduce the foreign demand for Canadian dollars.
D)aggravate an existing Canadian trade deficit.

Question

Quizplus · Accepted Answer

When a contractionary fiscal policy is implemented in Canada, it reduces domestic interest rates, which in turn reduces the attraction for foreign investment. This will reduce the demand for Canadian dollars and decrease their exchange rate on international markets, making imports more expensive. Thus, a contractionary fiscal policy tends to reduce foreign demand for Canadian dollars, causing a negative impact on the country's exports. Therefore, choice C is the correct answer.

All Else Equal, a Contractionary Fiscal Policy in Canada Which