As the Canadian government tries to stimulate the economy using monetary policy, it faces some dangers...

As the Canadian government tries to stimulate the economy using monetary policy, it faces some dangers and challenges. What are those dangers and challenges? How can they be managed?

Expert Solution

Answer - As a part of stimulating the economy, the central bank will implement the expansionary monetary policies . This will comprise of fall in reserve ratio , open market purchase etc. These tools increase the overall AD of the economy by stimulating consumption and investment. Hence AD rises and due to this the price level rises along with GDP. This leads to rise in inflation in economy. This is the problem with the expansionary monetary policy. In order to combat this , the supply also needs to rise to bring down price level. This can be done by expansionary fiscal policy which leads to rise in investment and supply. Rise in supply will lead to fall in price level and bring it back to level where it was before. Also , after some time , contractionary monetary policy can also be formulated.

Rahul Sunny answered 2 years ago

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As the Canadian government tries to stimulate the economy using monetary policy, it faces some dangers...

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