If the domestic government of a small open economy reduces government spending, the real exchange rate...

If the domestic government of a small open economy reduces government spending, the real exchange rate will __________ and net exports will ___________

		a. Increase, decrease
		b. Increase, increase
		c. Decrease, increase
		d. decrease

Solutions

Expert Solution

A reduction in the government spending will shift the reduce the interest rate and that will cause the capital flight from the country. This will depreciate the local currency and exports will rise. The answer is "C", exchange rate decrease and exports will increase.

Rahul Sunny answered 1 year ago

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