a) In the mid-1990s many Canadian governments carried large amounts of debt. To reduce 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. Explain why you would have agreed or disagreed with those commentators.

(b) If many Canadian governments were increasing their levels of spending. What is your prediction of the effect of this policy will have on the value of the Canadian dollar? What will this do the price Canadians pay for imported goods? What will happen to Canadian exports?