Fixed Exchange Rates
(Figure 23.6 Panel A)
Expansionary Fiscal Policy
Responsive int'l capital flows

Initially, this economy is at point E. Point E is a triple intersection. 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 K, there is a payments surplus. As a result, there is a movement to defend the the fixed rate and the money supply increases. The LM curve shifts to the right and we return to a triple intersection at E'. Click the Shift LM Curve to show the return to an official payments balance of zero.
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