6. Problems and Applications Q7 In the mid-1990s, many Canadian governments carried large amounts of debt. To reduce their debts, many of these governments reduced their spending. During this period, the Bank of Canada maintained a flexible exchange rate. When the spending cuts were announced, some commentators suggested that the spending cuts would drag the economy into recession. The fall in aggregate demand resulting from cuts to government spending caused money demand to fall and so caused the domestic interest rate to the world interest rate. This in turn caused in the value of the Canadian dollar and so an increase in net exports. The spending cuts aggregate demand so long as the Bank of Canada maintains a flexible exchange rate