Question

Suppose a prime ministerial candidate promises to increase the government budget surplus and claims that doing so will stop Canadian citizens from investing in foreign companies and increase the value of the dollar. Evaluate this promise.

Answer 1

Increase in the government budget surplus by Canadian government will shift the supply function of loanable funds market to the right reducing interest rate of Canadian funds. This reduction in the interest rate will discourage investors to keep their capital in Canadian deposits and so there will be capital flight in Canada. This reduces the demand for Canadian dollar and raises the demand for other currency. Hence Canadian dollar will actually depreciate. So the claim that this will  increase the value of the dollar is incorrect