Suppose the government of the United States has instituted an expansionary fiscal policy to boost aggregate output. The United States has a floating exchange rate regime and there is a high degree of capital mobility.

a. If the exchange rate value of the dollar remains steady, what are the effects of the expansionary fiscal policy on the U.S. national product and income? What is the effect on the U.S. 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 for U.S. national product and unemployment? Does the exchange rate change tend to reinforce or counteract the expansionary thrust of U.S. fiscal policy? Explain.