c) Reducing a deficit

• expenditure switching

• when the government

• alters the prices of imports/exports

• to divert consumer spending

• examples of expenditure switching

• protectionist policies

• currency devaluation

• to reduce a current account deficit, the government can…

• do nothing

• implement contractionary fiscal policy

• implement expenditure switching policies

• implement interventionist supply-side policies

• explain how doing nothing can reduce a current account deficit

• initially → cheap imports

• domestic currency is sold to buy foreign currency

• increased supply of domestic currency on the foreign exchange market

• domestic currency depreciates

• expensive imports

• the disadvantage of doing nothing

• currency depreciation can take a long time

• implementing contractionary fiscal policy can reduce a current account deficit by…

• decreasing real wages

• the disadvantage of implementing contractionary fiscal policy

• decrease in RGDP

• implementing expenditure switching policies can reduce a current account deficit by…

• increasing the price of imports for firms that buy them

• implementing interventionist supply-side policies can reduce a current account deficit by…

• decreasing the price of domestic goods/services

• increasing the quality of domestic goods/services

• the disadvantage of implementing interventionist supply-side policies

• opportunity cost