Fiscal Expansion under a fixed exchange

Fiscal Expansion under a fixed exchange rate has what effect(s) on the economy?

A.The money supply

B.Output

C.The exchange rate

D.The exchange rate decreases initially but then returns to its original point. Output is unchanged.

Answer: D. Fiscal expansion under a fixed exchange rate shifts the DD schedule outward, thereby causing an increase in output and a decrease in the exchange rate. However, with an accompanying outward shift of the AA schedule, output increases, and the exchange rate shifts outward. This shifts the exchange rate outward to its initial point.