Suppose net exports and net capital outflow are in equilibrium in a small open economy. If foreign governments adopt expansionary fiscal policy, in the small open economy the real exchange rate and net exports . g

If the government adopts an expansionary monetary policy, then the country's currency will depreciate since a higher interest rate will result in a lower value according to the PPP thoery. When a currency depreciates, the exports become cheaper for foreign countries, so they increase. While the imports become more expensive and they decrease.

Suppose net exports and net capital outflow are in equilibrium in a small open economy. If foreign governments adopt expansionary fiscal policy, in the small open economy the real exchange rate ____________ and net exports ____________. g

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Suppose net exports and net capital outflow are in equilibrium in a small open economy. If foreign governments adopt expansionary fiscal policy, in the small open economy the real exchange rate and net exports . g