This question asks you to consider the effect of the COVID-19 crisis on US fiscal policy and global imbalances. Assume that the world has flexible exchange rates and is only made of two large economies: the USA (US) and EuroZone (EZ). US runs a current account (CA) deficit while EZ runs a CA surplus when the two countries are at their full employment equilibrium level, where the DD and AA curves intersect.

What is the effect of US Fiscal Policy on the Euro zone economy and the USD/Euro (E_$/EUR ) exchange rate? Illustrate your arguments referring to the UIP condition and the AA/DD model.