Suppose that governments around the world (not including South Africa) begin to increase taxes and reduce government spending in order to reduce their budget deficits.

Use a long-run model of a small open economy to illustrate and explain the impact of this contractionary fiscal policy by foreigners on the South African exchange rate and the trade balance. Assume that South Africa is initially in a position of trade balance given this economy's real exchange rate.

[Ensure that you have labelled i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.]