14. Economic Performance - Budget Deficit, Policies to reduce it Flashcards
What are the four policies the government can use to rectify current account deficit?
Contractionary monetary or fiscal policyProtectionist measuresAllow the currency depreciateSupply-side policies
How will contractionary monetary or fiscal policy reduce a current account deficit?
By increasing taxation or increasing the interest rates the government or discouraging people from spending and as the UK has a high MPC for imports this will benefit the balance of payments.
What are the potential problems with contractionary monetary policy or contractionary fiscal policy as a way of rectifying current account deficit?
There is a conflict of objectives as this will lead to negative impact on the overall growth and will also increase unemployment.This depends on the extent to which taxation is increased and the elasticity of imports & exports.
How can protectionist measures rectify current account deficit?
You can please tariffs or quoters on imports or provide subsidies to domestic producers in order to reduce imports and increase exports strengthening the balance of payments.
What are the potential problems with using protectionist measures to rectify the current account deficit?
It may lead to retaliation from other countries even lineIt may create imported inflation Domestic producers will face little competition so less drive to become more efficient
How can allowing the currency to depreciate rectify the current account deficit?
WIDEC Exports will go up as the cheaper strengthening the balance of payments.
What are the potential problems with using a currency depreciation to rectify the current account deficit?
Depends heavily on the price elasticity of demand for exports and imports and will create imported inflation.
How can using supply side policies be used to rectify the current account deficit?
They will allow the proactivity to be boosted in the future meaning that UK exports will become more competitive and the balance of payments will improve.
What are the potential problems with using supply-side policy is directed by current-account deficit?
Supply-side policies take a long time to have an affect, they may not work and they are very expensive to implement.