Question

Discuss the following...

a. "A strong Canadian dollar is in the interest of Canada." Is this statement true? Justify your answer.

b. How is a change in the interest rate likely to affect an economy? The Minister for Finance has been advised to that to stimulate economic growth, he should use the interest rate as a policy instrument and a fixed exchange rate. Evaluate this advice.

Answer 1

a] True. In recent years Canada is in a trade deficit. This means that the nation is dependent on the imports. And also that the imports to Canada are greater than its exports. If the Canadian dollar isn't strong, i.e the value of the Canadian Dollar depreciates with respect to the foreign nations, the imports would become costlier and daily use items like fuel would have higher prices. Hence a strong Canadian dollar is in the interest of Canada.

b] A change in interest rates could regulate the cash flow in the economy and thus the inflation. To stimulate the economy the cash flow needs to be increased so as to make the spending and investment more. To do this the interest rates must be reduced to prompt borrowing from the banks. A fixed exchange rate must be maintained because if the dollar value is allowed to fall the extra cash which enters the system and thus into the consumers is of no additional use to them.