FIGURE 13-16: A Fiscal Expansion in a Large Open Economy Panel (a) shows that a fiscal expansion shifts the IS curve to the right. Income rises from Y₁ to Y₂, and the interest rate rises from r₁ to r₂. Panel (b) shows that the increase in the interest rate causes the net capital outflow to fall from CF₁ to CF₂. Panel (c) shows that the fall in the net capital outflow reduces the net supply of dollars, causing the exchange rate to rise from e₁ to e₂.