Q1)
Policymakers use fiscal and monetary policies to shift these curves to achieve macroeconomic
goals like price stability, full employment, and economic growth.
Fiscal Policy:
Fiscal policy is the use of government spending and taxation to control the economy.
Influencing Aggregate Demand:
Government spending directly increases AD. For example, spending on infrastructural
development like roads, schools, and recreational parks shifts the AD curve to the right.
Reducing taxes increases disposable income, which leads to increased consumer spending and a
rightward shift in the AD curve.
Influencing Aggregate Supply:
Fiscal policy can influence SRAS and LRAS through a number of channels. For example, cutting
corporate taxes can make production more productive, shifting SRAS to the right.
Spending on research and development, training, and education can cause productivity to rise,
shifting both SRAS and LRAS to the right. Improvement in healthcare can cause the population
to be healthier and more productive, also shifting SRAS and LRAS.
Monetary Policy:
Monetary policy involves the regulation of the money supply and interest rates, typically by a
central bank(Bank of Canada), to regulate economic activity.
Monetary policy primarily focuses on the movement of the AD curve for price stability.
Increasing the bank rate decreases money supply. This produces higher interest rates, decreasing
investment and consumer expenditures, thereby making the AD curve move to the left.
Conversely, decreasing the bank rate increases the supply of money, lowers interest rates, and
stimulates AD.
Why Policymakers Are Interested in AD and AS:
When the economy is in trouble, like when there is a recession, people do not spend money and
many businesses close down. This can lead to people losing their jobs and earning low incomes.
To fix this, the government uses fiscal and monetary policies to increase demand in the economy.
For example, they can lower taxes, increase government spending, or lower interest rates. These
actions encourage people and businesses to spend more money, which encourages the economy
and creates jobs. Sometimes prices of goods and services rise too fast, which is called inflation.
If this happens, the government may act to reduce demand in the economy so that prices won't
rise even higher. They may raise interest rates so that people find it harder to borrow or reduce
spending to cool things down. This keeps prices stable and protects people's purchasing power.
Governments also make use of policies to help the economy expand in the future. Governments
do this by making the country more effective at producing greater goods and services. This is
known as shifting the Aggregate Supply (AS) curve to the right. This can be achieved by
investing in education, technology, and in infrastructure like roads and the internet. These
long-run investments improve people's living standards and help ensure a stronger economy in
the future. In critical situations like the COVID-19 outbreak, the government utilizes both
spending and monetary instruments to benefit people. For example, they can give support
payments to families, help businesses to stay in operation, and lower interest rates so that loans
are less hard to get. These emergency interventions are required to protect employment,
enterprises, and the economy as a whole during disasters. A strong and firm economy has a
stable currency, like the Canadian dollar. Foreign investment pours in when there is a firm
economy and makes international trade easier. This makes a currency strong, which is cheaper to
import and induces other countries to trust in doing business with Canada.
Q2)
Implications of the Value of the Canadian Dollar on the Canadian Economy:
The exchange rate or the value of the Canadian dollar (CAD) to others, has played a huge role in
structuring the Canadian economy.
CAD appreciation (CAD becomes stronger):
●​ The nation becomes costly to overseas tourists; hence, it achieves a low tourist count.
●​ Exports reduce; or achieves a low count due to the fact that goods in Canada become
pricey to buyers from other countries.
●​ Foreign investment decreases when Canada is a more costly location to investors.
●​ Imports increase since foreign goods become cheaper for Canadian consumers.
Depreciation of CAD (CAD devaluation):
●​ Tourism increases, since Canada is cheaper.
●​ Exports increase, since Canadian products will be more competitively priced for the
world markets.
●​ Foreign investment can increase since Canada is now a cheaper destination to invest in.
Factors Influencing the Value of the Canadian Dollar:
●​ Demand for CAD: Demand and supply forces influence the Canadian dollar. Demand for
CAD goes up when the Canadian dollar strengthens, and demand for CAD falls when the
Canadian dollar weakens.
●​ Foreign Investment: Foreign investment in Canada increases the demand for CAD
because investors sell their currencies to buy CAD to invest in, and this strengthens the
Canadian dollar.
●​ Tourism: Tourism increases the demand for CAD as international tourists exchange their
currencies for CAD to be spent in Canada.
●​ Exports: Exporting goods and services places a demand on CAD, particularly if Canadian
exporters invoice in CAD and foreign buyers need to purchase CAD.
●​ Interest Rates: Higher Canadian interest rates attract foreign capital, as investors seek to
benefit from higher returns. This increases demand for CAD and leads to appreciation.
●​ Inflation and Productivity: High domestic inflation can reduce export competitiveness
and negatively impact the value of CAD. Low inflation and high productivity enhance
competitiveness and positively impact the value of CAD.
●​ Speculation: Fluctuations in the short-run value of CAD can be brought about by
currency traders selling and buying CAD based on anticipated differences in its value.
●​ Economic and Political Stability: Uncertainty like political instability or economic
uncertainty, can reduce investors' confidence and foreign investment and lead to
depreciation of the CAD.
●​ Government Policies and Tariffs: Government policies, including tax incentives and
investments in infrastructure, can influence foreign investment and hence the value of
CAD. Trade tariffs can also influence demand for CAD by influencing exports.
Q3)
Government policymakers have a range of tools to influence trade between economies.
Such tools are:
●​ Trade Barriers: Policy tools that seek to restrict or discourage the flow of goods and
services between countries. Some examples are:
Tariffs: Levied taxes on imported goods that increase its cost and make it less competitive
compared to domestically produced goods.
Quotas: Limits on the quantity of specific goods importable.
Embargoes: Complete prohibitions on trade with a single country or specific goods.
Non-tariff barriers: Regulation, standards and bureaucratic procedures making imports more
difficult to accomplish or costly (e.g., extremely high product standards of safety, complex
customs policies).
●​ Trade Promotion: These are tools designed to encourage or facilitate trade:
Free Trade Agreements: Treaties between countries to reduce or remove trade barriers between
them.
Subsidies: Government support to domestic producers to enable their products to compete in
foreign markets.
Export assistance: Government programs providing information, financial support, or other aid
to domestic firms willing to export.
Why Policymakers Meddle with Trade:
●​ Policymakers become involved in trade for a myriad of reasons, which usually
include trading off conflicting interests and objectives:
Infant industries: Rescue new industries until they are able to stand on their own and compete on
the global level.
National security: Rescue industries that are perceived to be crucial for national security.
Job protection: Rescue local jobs from being lost to low-cost foreign rivals.
Revenue Generation: Tariffs can raise revenues for governments.
●​ Correcting Market Failures: Policymakers may intervene to correct market failures
or react to negative externalities.This reflects a desire to:
Encourage ethical trade: Prevent trade in goods produced under exploitative conditions.
Improve consumer protection: Requiring imported goods to pass safety and quality tests.
Enforce social norms: Applying trade policy to promote labor rights or the conservation of the
environment.
Strategic Trade Policy: In some cases, governments might strategically use trade policy to obtain
a competitive advantage over other markets abroad or to promote specific domestic industries
they believe have the potential for expansion.
Political Reasons: Political reasons can also drive trade policy, such as lobbying by domestic
industries or pressure from special interest organizations.
Is an Increase in Trade Always a "Good Thing"?
●​ Possible Gains from Trade:
Greater efficiency: Through the ability to specialize in the production of goods and services that
they have a comparative advantage in, international trade creates greater efficiency and output.
Lower prices: Greater import competition can lead to lower prices for consumers.
Greater varieties: International trade introduces a greater variety of goods and services to
consumers.
Greater growth: Trade leads to greater growth through fostering growing markets, raising
investment, and facilitating the spread of technology.
●​ Potential Trade Costs and Challenges:
Job displacement: Increased imports in some sectors can lead to job displacement as domestic
industries cannot compete.
Income inequality: The gains and costs of trade may not be evenly distributed, hence
contributing to more income inequality.
Environmental degradation: Increased production and transportation due to trade can cause
environmental degradation.
Exploitation: Trade can lead to exploitation of labor or resources in developing countries.