As the crisis hits Asia and Asia’s incomes fall, the demand for French exports falls. This shifts France’s IS curve to the left, which pushes the interest rate and income towards point B. As the French interest rate moves below the world interest rate, however, international investors want to move their wealth out of French assets. This creates an excess supply
of French francs. If the exchange rate is flexible, the French franc depreciates relative to Asian currencies.
This makes French products more affordable for Asians, so French exports rise again. This shifts the IS curve back right, and it continues to do so until IS has returned to its original position. French income remains entirely unaffected by the
depression in Asia.