Question

Question 3: The Bank of Canada once again reduced its key rate by 0.5 percentage point on March 24, aligning with the United States. What are the elements of aggregate demand that the Bank of Canada hopes to stimulate through this monetary policy?

Answer 1

Generally there are four components of Aggregate Demand = C + I + G + Net export(X-M)

When Bank of Canada reduces rate of interest it simply means that loan and credit amount are now available at low interest rate. It inspire people to take loan for their consumption and investment propose because now loan are available at cheap rate. Hence we can say that when rate of interest reduces it means more money in the hands of the people.  

So due to reduction in interest rate the C(consumption) and Investment(I) increase. So C and I are elements of Aggregate demand that stimulate through this monetary policy.

Now we talk about how Net export affects through monetary policy. Lower rate of interet means less foregin investment because assets and securties does not give higher return on investment, it means lower foregin investment in the canada, decreasing demand for and value of the canada currency. So it means the canadian dollar become weak in comparision to other countries currency. So it causes candian goods cheaper for other countries, hence canada import increases and export decreases.