Question

Suppose the Canadian government decides it wants to use fiscal policy to increase output and employment. With the aid of diagrams, carefully explain whether and how an increase in government spending would shift the Aggregate Demand curve in a small open economy. a) with flexible exchange rates b) with fixed exchange rates.

Suppose Canada is a small open economy initially in Long Run equilibrium. Then the rest of the world reduces its demand for Canadian-produced goods. Using the AD/AS framework and diagrams, explain how this will affect the Canadian economy. Should the Bank of Canada keep the exchange rate fixed when this shock hits, or should it let the exchange rate adjust? Explain.

Canada is a small open economy. There is a large increase in savings in the rest of the world. Explain with the aid of diagrams how this affects the world interest rate, and how this affects the Canadian interest rate, Canadian savings and investment, Canada’s net capital outflow, net exports, and the exchange rate.

Answer 1