5.4 - Signposting

Question 1

Expenditure Reducing Policies to Rectify a Current Account Deficit

Answer 1

1. Contractionary Fiscal Policy
2. Monetary Policy

Question 2

Evaluation of Expenditure Reducing Policies to Rectify a Current Account Deficit

Answer 2

Expenditure reducing policies conflict greatly with other macroeconomic objectives of government

Question 3

Expenditure Switching Policies to Rectify a Current Account Deficit

Answer 3

1. Protectiontism
2. The exchange rate could be weakened

Question 4

Evaluation for using Protectionism to rectify a current account deficit

Answer 4

Evaluation 1) The biggest problem with using protectionism to close a trade defieit Is likellhood of strong retallation by trading partners.
Evaluation 2) Protectionism such as tariffs will increase prices for consumers and create a deadweight welfare loss of consumer surplus.
Evaluation 3) Protectionism goes against the aims and principles of the WTO,
Evaluation 4) Protectionist measures such as tariffs and quotas can be inflationary
Evaluation 5) Protectionism will worsen world allocation of resources.

Question 5

Evaluation for using Exchange Rate weakening to rectify a current account deficit

Answer 5

Evaluation 1) Depends on whether the Marshall-Lerner condition is satisfied; namely if the PEDx + PEDm > 1.
Evaluation 2) Inflation.
Evaluation 3) Purposeful exchange rate weakening could lead to retaliation and currency wars.
Evaluation 4) Depends on the severity of the trade restrictions applied by foreign governments.
Evaluation 5) Whether a weak exchange rate will rectify a current account deficit depends on income and thus demand overseas.
Evaluation 6) Whether a weak exchange rate will rectify a current account deficit depends on income and thus demand at home.

Question 6

Evaluation for using Supply Side Policies to rectify a current account deficit

Answer 6

Evaluation 1) Supply side policies are very expensive to implement.
Evaluation 2) Supply side policies also take a very long time to have an effect on productivity and efficiency.
Evaluation 3) Added to the above problem is the fact that supply side policies are not guaranteed to work.

Question 7

General Evaluation of Policies to Rectify a Current Account Deficit

Answer 7

1) The cause of the current account deficit.
2) Is the current account deficit really a problem?