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Suppose that the International Monetary Fund (IMF) is concerned about currency depreciation in a small open economy.
a. What type of fiscal policy should the IMF propose to the government of the small open economy to generate a currency appreciation (i.e.to generate an increase in the real exchange rate)? Please explain.
b. If the small open economy follows the IMF proposal above, what will happen to the trade balance of this small open economy? What will happen to the export and import? Please explain.
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