Suppose Canadian Real GDP Is Equal to Potential GDP

question 89

Multiple Choice

Suppose Canadian real GDP is equal to potential GDP.An appreciation of the Canadian dollar then implies that the Bank of Canada should engage in

• A)a loosening of monetary policy because of the excess demand for Canadian products that is creating the appreciation.
• B)a tightening of monetary policy because of the excess demand for Canadian products that is creating the appreciation.
• C)no change in monetary policy because the exchange rate is always allowed to float freely.
• D)an increase in inflation because of the higher cost of imports.
• E)either a contractionary or an expansionary policy,depending on the cause of the appreciation.