A small open economy with perfect financial capital mobility is currently in its long-run equilibrium with a trade deficit. With the increase in vaccination rates and the reopening of the economy, the government reduces its subsidy to households. As the same time, local businesses become more optimistic as they expect future sales will grow faster than previously anticipated.

Use the long-run classical model of a small open economy, discuss the long-run impacts of these changes on the levels of output, trade balance, price level, and both nominal and real FC/DC exchange rates. Explain and support your answer with one loanable fund market diagram and foreign exchange market diagram. Be sure to explain in words why the variables of interest change or remain unchanged.