Oil prices have fallen sharply in the past few months and are expected to remain low in the next few years. In this situation, the government of Oman, whose budget heavily depends on the country's oil export revenues, is running large deficits. Given the significant reduction in the government's expected revenues, Omani policymakers decide to cut government expenditure by the same amount as the revenue decline so that the budget deficit remains sustainable. Assume that Oman's trade partners are all oil importers and the trends in their economies can be taken as given.

1. What is the likely effect of this policy change on the equilibrium real GDP of Oman's economy this year (in the short run)? Please explain whether and how the reduction in government expenditure may affect the country's GDP in the short run.

1. What is the likely effect of the reduction in government expenditure on the real exchange rate of Oman's currency vs. the currencies of its trade partners over the next few years (in the long run)? Please explain whether and how the reduction in government expenditure may affect the economy's real exchange rate in the long run. How does this affect the competitiveness of Oman's producers (excluding the oil industry) vs. their counterparts in Oman's trade partners over the next few years?