4.6b Solutions To Current Account Deficit

Question 1

What are the 3 main categories of solutions to “Current Account Deficit”?

Answer 1

• Expenditure switching policies
• Expenditure reducing policies
• Other policies

Question 2

What are some examples of “Expenditure Switching Policies”?

Answer 2

• Switching spending from imported consumption to domestic consumption
• Protectionist Methods (tariff, quota)

Question 3

What are some potential problems with “Expenditure Switching Policies”?

Answer 3

1. Protectionist measures —> RETALIATION!
2. AD falling can lead to an increase in unemployment + fall in economic growth
3. Depreciation –> How do you finance the purchase of the currency

Question 4

What are some examples of “Expenditure Reducing Policies”?

Answer 4

! Contractionary fiscal policies !
–> Tax increase, government spending decrease
–> AD fall, income levels fall
–> Less imports

Question 5

What are some potential problems with “Expenditure Reducing Policies”?

Answer 5

1. AD falling causes fall in imports
2. Economic growth falls
3. Unemployment increases
4. Income distribution worsens

Question 6

What are some examples of other policies to solve “Current Account Deficit”?

Answer 6

• Export subsidy
• Tax breaks to export oriented industries
• Supply-side policies (investment in infrastructure… human capital..)