If the Bank of Canada increases real money supply, the Canadian dollar will likely... a. Increase proportionately to the increase in the real money supply. b. Be unaffected. c. Depreciate. d. Appreciate.

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If the Bank of Canada increases real money supply, the Canadian dollar will likely

Economics Nov 25, 2020

If the Bank of Canada increases real money supply, the Canadian dollar will likely...

Increase proportionately to the increase in the real money supply.

Be unaffected.

Depreciate.

Appreciate.

Expert Solution

If the Bank of Canada increases the real money supply, it will lead to a decrease in the interest rate. Thus, the investors will get a lower return in Canada and their will be capital outflow from Canada. Thus, the demand for the Canadian dollar will decrease and the Canadian dollar will depreciate.

All other options are incorrect as dollar will not be unaffected or appreciate

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