Suppose Canadian Real GDP Is Currently Equal to Potential GDP

question 4

Multiple Choice

Suppose Canadian real GDP is currently equal to potential GDP.Then,because of events elsewhere in the world,European investors decide to hold fewer Canadian financial assets,which leads to a sustained depreciation of the Canadian dollar.If the Bank of Canada is committed to its inflation target then it should

• A)implement an expansionary monetary policy by increasing its target for the overnight interest rate.
• B)implement an expansionary monetary policy by decreasing its target for the overnight interest rate.
• C)not intervene in the economy at all since this shock will not have any real effects in the short run.
• D)implement a contractionary monetary policy by increasing its target for the overnight interest rate.
• E)implement a contractionary monetary policy by decreasing its target for the overnight interest rate.

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