During the financial crisis of 2007-2008, the governor of the Bank of Canada expressed concern that the commercial banks were “hoarding” cash father than extending a more appropriate volume of loans. Why might the banks do this and what is the implication for the money supply? Explain the likely effects of a U.S. recession on the demand for Canadian exports. What would be the effect on Canadian aggregate demand? Suppose the Bank of Canada viewed its monetary policy as being appropriate for keeping output close to potential before any U.S. recession. What would you then predict to be the Bank’s response to the foreign recession?
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