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

a.If the exchange rate value of the dollar remains steady, what are the effects of the expansionary fiscal policy on national product and income? What is the effect on unemployment rate? Explain.

b.Following the fiscal expansion, what is the likely pressure on the exchange rate value of the dollar? Explain.

c.What are the implications of the change in the exchange rate value of the dollar for Canada national product and unemployment? Does the exchange rate change tend to reinforce or counteract the initial expansionary thrust of fiscal policy? Explain.