FIGURE 13-17: A Monetary Expansion in a Large Open Economy Panel (a) shows that a monetary expansion shifts the LM curve to the right. Income rises from Y₁ to Y₂, and the interest rate falls from r₁ to r₂. Panel (b) shows that the decrease in the interest rate causes the net capital outflow to increase from CF₁ to CF₂. Panel (c) shows that the increase in the net capital outflow raises the net supply of dollars, which causes the exchange rate to fall from e₁ to e₂.