11. In a small open economy with fixed exchange rates, a fiscal expansion has a potent effect on domestic output during the Keynesian short run of fixed prices. This is so because to fix the nominal exchange rate, the central bank must accommodate fiscal policy changes by shifting the LM curve in the same direction as fiscal policy shifts the JS curve. In the Keynesian long run and in the classical model, fiscal policy has no effect on output due to the response of the price level.