In an appearance before the US Congress, Ben Bernanke, the chairman of the Federal Reserve (Fed) issued the following opinion:“With the economy likely to be weak for several quarters and risks prolonged slowdown, the idea of a tax package passed by Congress seems appropriate at this time (…) Such actions could prove particularly effective in promoting economic growth…”

a) In an IS-LM diagram, give the effects on US GDP and interest rate an increase in government spending as suggested by Mr. Bernanke.
b) What would be the effects on consumption and investment of this policy?
c) Now suppose that Canada is a small open economy with mobility perfect capital. What would be the consequences for GDP and interest rates Canadians of the policy advocated by Mr. Bernanke?
d) What would be the effect on the Canada-US exchange rate and net exports Canadians of this policy?
e) How would your answers to c) and d) change if the Canada-US exchange rate were fixed?
f) If the Canadian government followed suit and in turn increased its spending, that would be the effect of this increase in Canadian spending on GDP and interest rates Canadian Balance Sheets?
g) What would be the effect of the increase in Canadian spending in f) on GDP and interest rates American equilibrium?