In a small open economy with a flexible exchange rate, what does a monetary injection by the Bank of Canada cause?
A) the dollar to depreciate
B) net exports to fall
C) an additional decrease in demand for Canadian-produced goods that is not realized in a closed economy
D) a shift of the aggregate demand curve to the right but less than in a closed economy

Question

Quizplus · Accepted Answer

A monetary injection by the Bank of Canada would increase the supply of Canadian dollars in the foreign exchange market, causing the value of the currency to decrease (depreciate) relative to other currencies. This would make Canadian exports cheaper and more attractive to foreign buyers, leading to an increase in net exports.

In a Small Open Economy with a Flexible Exchange Rate