1. expansionary fiscal policy 
means increasing government 
spending (G), which increase 
aggregate demand (yd) 
and income (y). 
As aggregate demand exceeds 
income (yd > y), 
there's an excess demand 
for goods. It will shift 
the IS curve to IS’, 
moving the equilibrium form
point E0 to point E1.

2.higher G leads to 
increase of domestic interest
rates (i) with the crowding
out effect by issuing bonds
so i>i*, 

Now the economy has a BP
surplus. there are capital
inflows : investors seek
higher returns in home country
selling foreign currency to
buy home currency



and because the exchange rate
is fixed, Central Banks will 
intervene they’ll purchase 
foreign currency and 
sell domestic currency. 
"Delta R" > 0
This will increase the money
supply, shifting the LM curve
to the right from E1 to E2. 

3. final equilibrium is 
reached at point E2 where, 
at the same interest rate, 
Y has increased : fiscal 
policy works perfectly 
under these circumstances.