Government spending increases in fixed exchange rate economies lead to an increase in the value of the currency, but don't boost the economy. On the other hand, reducing government spending doesn't affect the exchange rate but decreases economic output. This was shown in a study using a simple model and data from many countries. The study found that in the short term, negative shocks cause recessions, while positive shocks are absorbed by currency appreciation. The results also showed that the starting conditions matter, with recessions making positive shocks helpful and high inflation affecting the exchange rate in response to negative shocks.