current account deficit reducing expenditure

• What is a key objective for governments regarding trade balance?

  To avoid large current account deficits
• What broad categories of policies can governments use to address a current account deficit?

  Expenditure-reducing and expenditure-switching policies
• What is the primary goal of expenditure-reducing policies?

  To decrease spending on imports
• How do expenditure-reducing policies work?

  By reducing aggregate demand and incomes
• What happens to the marginal propensity to import when incomes decrease?

  It decreases
• What type of policies are contractionary monetary and fiscal policies?

  Expenditure reducing policies
• What effect do contractionary monetary and fiscal policies have on aggregate demand?

  They shift it to the left
• What is a major conflict of objectives when using expenditure-reducing policies?

  Reduced growth and increased unemployment
• What might happen to demand-pull inflation when aggregate demand is reduced?

  It might fall below target
• Under what condition may reducing aggregate demand not decrease incomes?

  If the economy is at full employment
• Why might contractionary policies be ineffective in reducing a current account deficit?

  If the marginal propensity to import is low
• What is a type of expenditure-switching policy?

  Protectionism
• What is the aim of expenditure-switching policies like protectionism?

  To switch spending to domestic goods
• What is a major problem associated with using protectionism?

  Retaliation
• How might retaliation worsen a current account deficit?

  By decreasing export revenues more
• What international organization's rules might protectionism violate?

  World Trade Organization
• How can protectionism be inflationary?

  By increasing the price of imports
• Besides protectionism, what is another expenditure-switching policy?

  Weakening the exchange rate
• How does a weak exchange rate affect imports and exports?

  Imports become more expensive, exports cheaper
• What is the expected effect of a weaker exchange rate on the demand for imports?

  Demand for imports will decrease
• Who typically implements policies to weaken the exchange rate?

  The central bank
• How can a central bank weaken the exchange rate?

  Reduce interest rates
• What is the effect of lower interest rates on hot money flows?

  It incentivizes hot money outflow
• What is another policy that can increase the money supply?

  Quantitative easing
• How can a central bank directly increase the supply of its own currency?

  By selling domestic currency reserves
• What condition must be satisfied for a weaker exchange rate to improve a current account deficit?

  The Marshall-Lerner condition
• What does the Marshall-Lerner condition state?

  PEDx + PEDm > 1
• What is the J-curve effect?

  Deficit worsens before it improves
• How can weak exchange rates cause inflation?

  Demand-pull and cost-push inflation
• Why is purposefully weakening the exchange rate potentially problematic?

  It can lead to currency wars
• What is the primary goal of supply-side policies in this context?

  To boost international competitiveness
• What are two ways supply-side policies can improve international competitiveness?

  Price and quality competitiveness
• Name 3 supply-side policies that could be used

  Spending on education, infrastructure, subsidies
• How can supply-side policies affect both export revenues and import expenditure?

  Boosting exports and switching to domestic goods
• What is a common criticism of supply-side policies?

  They are very long-run policies
• What is required for supply-side policies to be effective in addressing a current account deficit?

  They need to be heavily targeted
• What is crucial to consider when evaluating policies to address a current account deficit?

  Conflict of objectives
• Why is understanding the cause of the current account deficit important?

  To target the solution correctly
• Why are time lags important to consider when choosing policies?

  Some policies work faster than others
• Why is the cost of policies an important evaluation point?

  They carry large opportunity costs