Which of the following would decrease the real exchange rate in a small open economy in the long run?
A) a personal income tax cut
B) a reduction in government spending
C) a tariff on imports
D) an increase in investment

Question

Quizplus · Accepted Answer

A reduction in government spending decreases the demand for domestic currency to purchase government bonds, which can lead to a decrease in the real exchange rate as the currency's value falls relative to foreign currencies.

Which of the Following Would Decrease the Real Exchange Rate