True or False?
The statement is true. When the peripheral country's IS curve shifts to the right, creating upward pressure on domestic income and the demand for money, its monetary authority will have to expand the domestic money supply to maintain the fixed exchange rate parity, shifting the domestic LM curve to the right by the same amount as the fiscal policy shifted IS, thereby validating an increase in domestic output at the unchanged world interest rate. In the long-run, of course, the peripheral country's price level will rise, raising its real exchange rate and choking of any short-run increase in employment, with its domestic monetary authority adjusting the money supply to prevent any change in the fixed exchange rate.