Assume the AA $-$ DD equilibrium model under the floating exchange rate regime. How will the fiscal policy impact the equilibrium? Select one $-$ the most appropriate answer.

Fiscal expansion brings about fall in aggregate demand and consequently increase in output that in turn leads to diminishing interest rate and domestic currency depreciation. Equilibrium is restored.

No correct answer.

Fiscal restriction brings about cut in aggregate demand and consequently decrease in output that in turn leads to diminishing interest rate and domestic currency depreciation. New equilibrium is set.

Fiscal expansion brings about jump in aggregate demand and consequently increase in output that in turn leads to diminishing interest rate and domestic currency depreciation. New equilibrium is set.