Question

A small open economy with a fixed exchange rate e2 is initially at equilibrium A with LM*1 and equilibrium output Y1. If there is an increase in government spending to the new equilibrium will be at _____, holding everything else constant.

Answer 1

If there is an increase in government spending, the new equilibrium will be at B holding everything else constant.

What is government spending?

Government spending can be the defined as the money spent on goods and service or money spent by government to provide services to the public.

An increase in government spending will tend to lead to increase the demand of goods and service which inturn means that consumption expenditure will as well increase.

Inconclusion the new equilibrium will be at B holding everything else constant.

Learn more about Government spending here:brainly.com/question/27232573