M onetary conditions is the term used to describe the combined effect of the level of short-term interest rates and the exchange rate for the Canadian dollar. With an open economy like Canada’s, and a flexible exchange rate, changes in the dollar’s external value have a big influence on the demand for goods and services. For example, a considerably lower dollar can result in more goods being exported, increased tourism, and higher import prices, leading to fewer goods being imported. Higher import prices also affect consumer prices. This means that the Bank must consider the exchange rate when lowering or raising the Bank Rate because it is the combined effect of interest rates and the exchange rate that determines monetary conditions and helps keep the economy on a smooth course. It is sometimes mistakenly said that the Bank of Canada changes its monetary policy by moving the Bank Rate up or down. What is really happening is that the Bank is
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