c) Reducing a deficit

c) measures to reduce a country’s imbalance on the current account

expenditure switching = when the government attempts to alter the prices of imports/exports in order to divert consumer spending

• protectionist policies

• currency devaluation

to reduce a current account imbalance, the government can…

• do nothing

  • cheap imports

  • domestic currency is sold to buy foreign currency

  • domestic currency depreciates

  • expensive imports

• disadvantages

  • long-term

• implementing contractionary fiscal policy…

  • decreases real wages

  • decreases the demand for imports

• disadvantage

  • decrease in RGDP

• implementing expenditure switching policies…

  • decreases the price of domestic goods/services

  • increases the demand for domestic goods/services

• implementing interventionist supply-side policy…

  • decreases the price of domestic goods/services

  • increases the quality of domestic goods/services

• disadvantage

  • long-term