In Canada in recent years, using the structural primary budget balance as an indicator of fiscal policy and the real interest rate as an indicator of monetary policy we see:
A) a shift to more restrictive fiscal policy and more expansionary monetary policy.
B) a shift to more restrictive fiscal policy and more restrictive monetary policy.
C) a shift to more expansionary fiscal policy and more expansionary monetary policy.
D) consistently expansionary fiscal and monetary policies aimed at a potential output target.

Question

Quizplus · Accepted Answer

The structural primary budget balance, which adjusts for the economic cycle and one-off expenditures, indicates the stance of fiscal policy. A shift to a more restrictive fiscal policy suggests efforts to reduce deficits or build surpluses, independent of economic cycles. Meanwhile, the real interest rate, adjusted for inflation, indicates the stance of monetary policy. A lower real interest rate suggests a more expansionary monetary policy, aimed at stimulating economic activity. This combination reflects a policy mix where fiscal policy is tightened to ensure long-term sustainability, while monetary policy is loosened to support economic growth in the short term.

In Canada in Recent Years, Using the Structural Primary Budget