In a small open economy with perfect capital mobility, a reduction in the government's budget deficit net exports and the real exchange rate . Group of answer choices increases; appreciates increases; depreciates decreases; appreciates decreases; depreciates

The correct answer is "increases; depreciates".

Explanation:

A small open economy with perfect capital mobility has the economical advantage of moving capital from one country to another without generating any additional cost. Therefore, a reduction in the government budge deficit in this "easy-to-export" economy will increase net exports. On the other hand, the real exchange rate will depreciate as the price of domestic goods will increase result of the increase in the net exports.

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