When the Bank of Canada lowers interest rates, exports

Question

Quizplus · Accepted Answer

When the Bank of Canada lowers interest rates, it makes borrowing cheaper for Canadian investors, which leads to increased investment in the country. This causes an increase in demand for Canadian dollars, leading to an appreciation in the value of the dollar. As a result, Canadian exports become relatively more expensive for buyers in foreign countries, which reduces demand for Canadian goods and services. However, the appreciation of the Canadian dollar also makes imports cheaper for Canadian consumers, leading to an increase in demand for foreign goods and services. Therefore, exports decrease and imports increase. However, since the increase in exports is greater than the increase in imports, the net effect is an increase in net exports.

When the Bank of Canada Lowers Interest Rates, Exports