Explain what fiscal and monetary policy may do to exchange rates

The Mundell–Fleming model looks at short-run policy under different capital mobility. With high mobility, tight monetary policy raises rates, attracts inflows and appreciates the currency, and fiscal expansion also lifts rates and appreciates it. In that setting, loose fiscal with tight money gives strong appreciation, tight fiscal with loose money strong depreciation. With low mobility, trade flows dominate, so fiscal expansion raises imports and weakens the currency. Monetary models focus on price levels: faster money growth brings depreciation, and with sticky prices the currency overshoots, falling further in the short run than in the long run. The portfolio balance approach adds that persistent fiscal deficits can weaken a currency over time, if investors demand a lower price or higher return to hold the growing debt. Always ask about capital mobility first.