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Explain what would happen to the value of Canadian currency and short run economic performance of...

Explain what would happen to the value of Canadian currency and short run economic performance of Canada if U.S imposes expansionary monetary policy

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Answer #1

If US imposes expansionary monetary policy, then it decreases the interest rate in the USA and investors move out from the USA and can enter the market of Canada. It will increase the value of Canadian currency, because investors will demand more of it. So, increase in demand of Canadian currency is going to appreciate its value, while value of US dollar decreases.

In the short run, above changes, help increase the US exports, while Canada faces price disadvantage in the international market due to the appreciated value of Canadian currency. Hence, exports from Canada decreases and imports to Canada increases due to the stronger Canadian currency. It causes AD to decrease and real GDP decreases in the short run. It can also lead to increase in unemployment and decrease in inflation in the short run in the economy of Canada.

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