Floating Exchange Rates
(Figure 23.4 Panel A)
Expansionary Fiscal Policy
Responsive international capital flows

Initially, this economy is at point E0. Point E0 represents a payments balance of zero. Expansionary fiscal policy causes the IS curve to shift to the right. Click the Shift IS Curve button to show the change on the graph. At point T2, there is a payments surplus. As a result, the country's currency appreciates. The FE and IS curves shift to the left and external balance is reestablished at E2. Click the Shift FE & IS Curves button to show this change on the graph.
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