Analysis of Expansionary Monetary Policy to Address a Dual Demand and Supply Shock in Canada

This commentary examines how the Bank of Canada utilizes expansionary monetary policy to address a recessionary gap caused by a dual shock: a decrease in aggregate demand (AD) due to low consumer confidence and a decrease in short-run aggregate supply (SRAS) resulting from US tariffs.

Applying the AD-AS framework, the author analyzes the impact of lowering interest rates to restore potential output and maximize economic well-being. The work is distinguished by its nuanced evaluation of the trade-off between growth and price stability, as well as a critical discussion on the limitations of monetary policy versus the necessity of long-term supply-side interventions during structural transitions.