Question

Question: In the late 1980s Canadian economists argued that the high interest rate policies of the Bank of Canada weren't just causing high unemployment—they were also making it hard for Canadian manufacturers to compete with the United States. Explain this complaint, using our analysis of how monetary policy works under floating exchange rates.

Short answer

The increase in interest rate leads to currency appreciation due to the floating exchange rate system, which reduced the demand for Canadian goods and services, and the unemployment rate increased.

Step-by-step solution

Explanation

The high-interest policies of the Bank of Canada attracted foreign investors. The demand for the Canadian dollar increased, which led to its appreciation. This currency appreciation made exports expensive. In other words, importing from Canada became more costly for other countries. This reduced the demand for Canadian goods and services. Hence, the producers faced losses, and the employment rate fell.