Ch29

Why might an expansionary fiscal policy reduce a current account deficit?

• Higher government spending may be on state pensions, which could increase consumer expenditure.

• Higher government spending could be on training workers, which could raise productivity.

• Lower taxes on income could result in higher aggregate demand and demand-pull inflation.

• Lower corporate tax could result in an increase in firms’ expenditure on imported banking services.

Which change would be most likely to reduce a current account deficit and inflation?

• A cut in export subsidies

• Depreciation of the currency

• Increase in income tax

• Tariff on imports

Which government policy measure may increase a surplus on the current account of the balance of payments?

• Decrease in the money supply of importing countries

• Imposition of exchange control

• Increase in the quality of products that can be imported

• Removal of import tariffs

A country has a deficit on the current account of the balance of payments and demand-pull inflation. Which of the following would help to reduce both the current account deficit and demand-pull inflation?

• Decreasing the price of the currency

• Decreasing investment

• Increasing a budget surplus

• Increasing the money supply

Why might an increase in the surplus on the current account of the balance of payments not require a government to introduce anti-inflationary policy tools?

• The current account surplus arises from primary and secondary income surpluses.

• The current account surplus arises from a trade in goods and services balance.

• The economy is operating with a growing budget deficit.

• The economy is operating with spare capacity.

Which type of policy is most likely to lead to a long-term improvement in a country’s current account balance?

• Fiscal

• Monetary

• Protectionist

• Supply-side

Which policy tool designed to reduce unemployment is most likely to reduce a current account deficit?

• Cut in income tax

• Increase in the number of public sector workers employed

• Increase in government spending on training

• Increase in the money supply

What could explain a fall in the number of workers unemployed despite a country experiencing a growing current account deficit?

• Government spending has fallen.

• Investment has increased.

• Labour mobility has fallen.

• The size of the labour force has increased.

Which policy tool is likely to be least effective, in the short term, in reducing a deficit on the current account of the balance of payments?

• Contractionary fiscal policy

• Increase in export subsidies

• Increase in the money supply

• Increase in import tariffs

How does supply-side policy seek to reduce a current account deficit?

• D

• B

• A

• C