When the Canadian dollar depreciates, the direct effect on Canadian inflation always reinforces the indirect effect.

Question

Quizplus · Accepted Answer

When the Canadian dollar depreciates, it makes imported goods more expensive, which can lead to higher inflation. This is the indirect effect. However, the direct effect is that a weak Canadian dollar makes domestic goods cheaper for foreign buyers, potentially increasing demand for Canadian exports and boosting the economy. This helps to offset some of the inflationary pressure from the indirect effect, but not enough to cancel it out completely. Therefore, the direct effect and indirect effect reinforce each other when the Canadian dollar depreciates.

When the Canadian Dollar Depreciates, the Direct Effect on Canadian