The Depression taught Canada how to deal with economic shocks of demand and supply. Since then Canada has utilized reviewed and updated policies to regulate the economy.The fiscal policies are geared towards keeping the goods market stable while the Monetary policies are geared towards keeping the financial markets in equilibrium through the exchange rates, interest rates and money supply.
             Monetary policy in Canada aims to increase output and income and simultaneously keep inflation at its low target rate. David Dodge, Governor of the Bank of Canada to the School of Policy Studies, explained how monetary and fiscal policies in Canada work. According to Dodge, if the economy is at its potential and a negative demand shock occurs, it will put downward pressure on inflation(away from its target). To bring inflation back up the Bank of Canada lowers its overnight interest rates and through markets, interest rates and exchange rates, the economy's output increases toward potential and inflation returns to its target .For supply shocks, consider price surprises from sensitive parts of the CPI.(vegetables,fruit,gas,oil). The banks' only measures exclude such components, and as a result the interest rates response are usually minimal. In summary, monetary policy cannot accommodate for temporary supply shocks too well.
             Fiscal policy uses government expenditures and taxes to stimulate the economy. A decrease in taxes allows households to have more disposable income and therefore spend more. This causes aggregate demand to increase, consequently, supply must increase to offset the increase in demand. Now the economy is at a higher output level. Dodge explains a very similar scenario for policies used by Canada.The Fiscal policy uses tax revenue and employment insurance payouts as stabilizers of the market. When the economy slows , tax revenues decrease and payouts increase to buffer the effec
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