8. In the IS-LM model for an open economy, an increase in the budget deficit has the following impact: 1. A decrease in the interest rate, which causes a capital outflow, a depreciation of the exchange rate, an increase in exports and possibly an improvement of the trade balance. An increase in the interest rate, which causes a capital inflow, a depreciation of the exchange rate, an increase in exports and possibly an improvement of the trade balance. The interest rate will be unchanged because the central bank sets it, and therefore the exchange rate is also unchanged. The interest rate will be unchanged because the central bank sets it, and therefore the exchange rate will appreciate because of the demand for goods and services increases