6.5 Policies To Correct Imbalances In The Current Account Of The Balance Of Payments Flashcards
What is the government’s objective in relation to the current account?
To maintain a sustainable balance, avoiding persistent deficits or surpluses.
Why are persistent current account deficits problematic?
They can lead to external debt, loss of foreign reserves, and pressure on exchange rates.
Why might large surpluses also be a concern?
They may reflect low domestic consumption
How can contractionary fiscal policy reduce a current account deficit?
Reduces domestic consumption, including demand for imports.
How can expansionary fiscal policy worsen a current account deficit?
Increases aggregate demand, potentially boosting imports.
How does contractionary monetary policy affect the current account?
Raises interest rates, reduces AD and import demand; may cause currency appreciation.
How can supply-side policies help improve the current account?
Increase productivity, reduce unit costs, and enhance export competitiveness.
How can tariffs reduce a current account deficit?
By making imports more expensive, discouraging their consumption.
How do quotas affect the current account?
Directly limit the quantity of imports, reducing import spending.
What are the risks of using protectionism to correct imbalances?
Can lead to retaliation, reduced export markets, and inefficiencies.
