A US fiscal expansion (a rise in g*) shifts both GMER and GME'k. In terms of Figure 11.12, the new equilibrium is at e2. The rate of interest is higher, there is a real depreciation in Europe, but output falls because real producer wages in Europe rise.

Output and employment in the US rise, so that the US fiscal expansion constitutes a beggar-thy-neighbour policy. It leads to lower output and higher unemployment in Europe.