1.Canada has instituted an expansionary fiscal policy to boost the economy. Canada has a floating exchange rate regime and there is a high degree of capital mobility (15 points).

a)Before the exchange rate value of the CAD changes, what are the effects of the expansionary fiscal policy on aggregate consumption and national income? How would real investment be affected? Explain.

b)Following the fiscal expansion, how will the current account and financial account balances be affected in the short run? what is the likely pressure on the exchange rate value of CAD? Explain.

c)What are the implications of the change in the exchange rate value of the CAD for Canadian national product and unemployment in the short run? Does the exchange rate change tend to reinforce or counteract the expansionary thrust of Canadian fiscal policy? Explain.