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“Consider IS curve and LM curve in an open economy as explained in a
Mundell Flemming model. By having expansionary fiscal policy, there is
an increase in government purchase and the IS curve shifts towards
right. There is no change in LM curve and it remains vertical. Due to
the shift of IS curve, the interest rate and income level remains same
but the exchange rate varies”.
Required:
Keeping in view of open economy in the above scenario, if the
government want to use expansionary fiscal policy to increase the
income level then it cannot do that, why?

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