Floating Exchange Rates
(Figure 24.4 Panel B)
Expansionary Fiscal Policy
Unresponsive int'l 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 T3, there is a payments deficit. As a result, the country's currency depreciates. The FE and IS curves shift to the right and external balance is reestablished at E3. Click the Shift FE & IS Curves button to show this change on the graph.
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