Final answer:
Under a floating exchange rate, fiscal policy may fail to influence output as increased spending causes currency appreciation, negatively impacting net exports and offsetting the initial rise in aggregate demand.
Step-by-step explanation:
To demonstrate that fiscal policy is ineffective at influencing output under a floating exchange rate system, one must consider the interaction between fiscal policy, exchange rates, and international trade. When a government increases its spending (fiscal expansion), it leads to an increase in aggregate demand. This would typically raise output and employment. However, under a floating exchange rate system, the increased demand also tends to increase the interest rate, which then attracts foreign capital, causing the domestic currency to appreciate. An appreciation of the currency makes exports more expensive and imports cheaper, which reduces net exports. This reduction in net exports can offset the initial fiscal expansion, leaving the overall output largely unchanged. The following figure would illustrate this scenario with an aggregate expenditure-output diagram showing that the initial fiscal expansion fails to close the recessionary gap due to the exchange rate's response that nullifies the policy's impact on output.