1. One journalist writing about the complex interactions between various markets in the economy stated: "When the government spends more than it takes in taxes it must sell bonds to finance its excess expenditures. But selling bonds drives interest rates down and thus stimulates the economy by encouraging more investment and decreasing the foreign exchange rate, which helps our export industries." Carefully analyze the statement. Do you agree? Why or why not?

2. Read this article (https://www.bankofcanada.ca/2020/08/understanding-inflation-targeting/) about Understanding inflation targeting and answer the following questions: (20 points)

1. Why does Bank of Canada have a target for inflation?
2. When does inflation deviate from the target? And how does central bank respond when inflation deviate from the target?

3. What is the difference between fiscal and monetary policy? 4. When the government spends more than it takes in taxes it must borrow money to finance its expenditure. How does expansionary fiscal policy affect government's debt?