A nested‐grid ocean circulation modeling system is used to study the response of Lunenburg Bay in Nova Scotia, Canada, to local wind‐forcing, tides, remotely generated waves, and buoyancy forcing in the summer and fall of 2003. Quantitative comparisons between observations and model results demonstrate that the modeling system reproduces reasonably well the observed sea level, temperature, salinity, and currents in the bay. Numerical results reveal that the spatial and temporal variability of temperature and salinity in the bay during the study period is mainly forced by the local wind stress and surface heat/freshwater fluxes, with some contribution from tidal circulation. In particular, the local heat balance on the monthly timescale is dominated by cooling due to vertical advection and warming due to horizontal advection and net surface heat flux, while high‐frequency variations (timescales of 1–30 days) are mainly associated with vertical advection, i.e., wind‐induced upwelling and downwelling. There is also a strong baroclinic throughflow over the deep water region outside Lunenburg Bay that is strongly influenced by wind‐forcing. The vertically integrated momentum balance analysis indicates a modified geostrophic balance on the monthly timescale and longer, and is dominated by the pressure term and wind minus bottom stress in the high‐frequency band.