True or False?
The answer is false. Under fixed exchange rates a fiscal expansion increases consumption and/or investment. The equilibrium capital account surplus (deficit) must always equal the equilibrium current account deficit (surplus), so when investment rises relative to savings, the current account must deteriorate. If there is less than full employment this will happen as a result of the increase in imports that accompanies the resulting increase in income. Under full-emloyment it will occur as a result of the rise in the real exchange rate that takes place when the price level increases.
The current account will also deteriorate in response to a fiscal expansion when the exchange rate is flexible, even though output and the price level will be unaffected. When the real exchange rate increases to ensure that the IS curve continues to pass though the LM-ZZ intersection it will lead to an increase in imports relative to exports and the current account surplus will get smaller (or the deficit larger).
The trick in answering this question is to look at what must happen to investment relative to savings and reason from there. We know that either investment or consumption must increase and if consumption increases savings must fall. This means that the capital account surplus gets bigger (or the deficit smaller). Either output or the real exchange rate must then adjust to create an equal increase in the current account deficit (or decline in the surplus). Remember, the desired capital account surplus must equal the desired current account deficit when real goods market equilibrium holds.