Suppose the Canadian economy is producing at the natural rate of output. An appreciation of the Canadian dollar will cause ________ in real GDP in the short run and ________ in the aggregate price level in the short run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)

Question

Quizplus · Accepted Answer

An appreciation of the Canadian dollar makes Canadian goods more expensive to foreign buyers, reducing exports and increasing imports. This leads to a decrease in aggregate demand, which causes a decrease in real GDP and the aggregate price level in the short run, assuming no supply side effects.

Suppose the Canadian Economy Is Producing at the Natural Rate