An expansionary fiscal policy in Canada might unintentionally cause demand-pull inflation if:
A)the dollar unexpectedly appreciates while the expansionary policy is in place.
B)the dollar unexpectedly depreciates while the expansionary policy is in place.
C)the policy produces severe crowding out.
D)our trading partners experience recession during the time of the fiscal policy action.

Question

Quizplus · Accepted Answer

If the expansionary fiscal policy leads to an unexpected depreciation of the Canadian dollar, it may increase import prices and aggregate demand, causing inflationary pressures. This is because a weaker currency makes imports more expensive, which can increase consumer prices and reduce the purchasing power of Canadians. As a result, it can also reduce the competitiveness of domestic firms and lead to higher domestic prices for goods if they cannot meet domestic demand. Therefore, an unexpected depreciation of the Canadian dollar can lead to demand-pull inflation due to expansionary fiscal policy.

An Expansionary Fiscal Policy in Canada Might Unintentionally Cause Demand-Pull