1. Suppose that a small open economycalled Oceania, is concerned about its exports and wants its currency to depreciate to increase its exports.

• What type of fiscal policy should the government of Oceania use to generate a currency depreciation? Should the government increase or decrease spending so that currency depreciates? Explain what happens when government spending changes in detail.
• Illustrate graphically the impact of the change in government spending, on the exchange rate of the small open economy, Oceania.Make sure to label the axis and all the curves and show the shifts.
• What will happen to the trade balance of the small open economy, assuming that it started from a position of trade deficit? Show the trade balance on the axis.