In a flexible exchange rate system with perfect capital mobility, if restrictive fiscal policy is implemented, we will see

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In a flexible exchange rate system with perfect capital mobility, when restrictive fiscal policy is implemented, it causes a leftward shift in the IS curve due to a decrease in government expenditure or an increase in taxes, leading to a decrease in output and income. This shift in the IS curve causes a depreciation of the currency, as domestic residents demand fewer domestic goods and services, leading to a higher demand for foreign exchange. This depreciation of the currency leads to an increase in net exports, causing a subsequent shift of the IS-curve back to its original position. Therefore, we will see a shift of the IS-curve to the left followed by a depreciation of the currency and then a subsequent shift of the IS-curve back to its original position.

In a Flexible Exchange Rate System with Perfect Capital Mobility