Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. What will happen to the Canadian IS curve as a result of the leftward shift of the U.S. IS curve?
A) It will shift rightward.
B) It will shift leftward.
C) It will not change.
D) The IS curve will show an increase.

Question

Quizplus · Accepted Answer

If the U.S. IS curve shifts leftward, it means there has been a decrease in U.S. demand for Canadian goods and services, which will reduce Canadian exports, decrease Canadian output and therefore decrease Canadian aggregate demand. This will lead to a leftward shift of the Canadian IS curve.

Suppose That Canada Decides to Peg Its Dollar ($C, or the Loonie)