In a small open economy a decrease in the exchange rate will net exports and shift the curve.

The correct answer is increase; IS.

Explanation:

A decline in the exchange rate will make the domestic products cheaper as compared to earlier. So, the demand for domestic products by foreign consumers will increase. Consequently, there will be an increase in exports.  

As the demand for domestic good increases in the foreign market, the income at each level of interest rate will increase, leading to a rightward shift in the IS curve showing an increase in the output, income, and employment.

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