If the Bank of Canada chooses to prevent any change in the exchange rate when government spending increases, what is most likely to happen?
A) crowding-out effects
B) no crowding-out effects
C) no increase in the demand for goods and services
D) a decrease in aggregate demand

Question

Quizplus · Accepted Answer

If the Bank of Canada chooses to prevent any change in the exchange rate, it would mean they are intervening in the foreign exchange market to maintain the same exchange rate. This would result in no change in the relative prices of domestic and foreign goods, meaning no change in the demand for goods and services. As a result, there would be no crowding-out effects or any decrease in aggregate demand.

If the Bank of Canada Chooses to Prevent Any Change