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With regard to the Current Account Deficit (CAD), which of the following actions can be taken by the government to reduce the deficit?
1. Devaluation of exchange rate
2. Protectionism
3. High consumer spending
4. Supply side policies to improve the competitiveness of domestic industry
Select the correct answer using the code given below:
- a)1 and 3 only
- b)2 and 4 only
- c)1, 3 and 4 only
- d)1, 2, 3 and 4
Correct answer is option 'B'. Can you explain this answer?
Most Upvoted Answer
With regard to the Current Account Deficit (CAD), which of the follow...
Statement 1 is incorrect: Overvalued exchange rate helps to reduce the Current Account Deficit (CAD). The country can also use monetary policy to improve the domestic currency’s valuation relative to other currencies through devaluation, which reduces the country’s export costs. Devaluation of exchange rate (make exports cheaper - imports more expensive)
Statement 2 is correct: The government could increase tariffs on imports or even impose quotas. Both these measures would have the impact of reducing imports and therefore improve the current account. Protectionism may lead to retaliation - with other countries placing tariffs on our exports - so exports could decrease. Protected by tariffs - domestic industries may become uncompetitive because there is less incentive to cut costs.
Statement 3 is incorrect: High consumer spending does not help to reduce the Current Account Deficit (CAD). Reduce domestic consumption and spending on imports (e.g. tight fiscal policy/higher taxes) helps reduce the Current Account Deficit (CAD).
Statement 4 is correct: Supply side policies can improve the competitiveness of the economy and help make exports more attractive. This can improve the current account position, but it may take considerable time to have an effect.
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With regard to the Current Account Deficit (CAD), which of the follow...
Reducing Current Account Deficit (CAD)
The Current Account Deficit (CAD) is the difference between a country's total exports and total imports of goods and services, along with net income and transfer payments. A high CAD can lead to a decline in a country's foreign exchange reserves, making it difficult to finance imports and pay off foreign debt. Here are some actions that can be taken by the government to reduce the CAD:
1. Devaluation of exchange rate:
Devaluation of the exchange rate refers to the reduction of the value of a country's currency in relation to other currencies. A devaluation makes a country's exports cheaper and imports more expensive, making it more attractive for foreign buyers to purchase domestic goods and services. This can lead to an increase in exports and a decrease in imports, which can help reduce the CAD.
2. Protectionism:
Protectionism refers to the implementation of policies that protect domestic industries from foreign competition. This can be done through various methods like imposing tariffs, quotas, and subsidies. Protectionism can help reduce imports and promote domestic production, which can help reduce the CAD.
3. High consumer spending:
High consumer spending can lead to an increase in demand for imported goods and services, which can contribute to the CAD. The government can try to reduce consumer spending through measures like increasing taxes and reducing subsidies, which can help reduce the CAD.
4. Supply-side policies to improve the competitiveness of domestic industry:
Supply-side policies can help improve the competitiveness of domestic industries by reducing the cost of production and improving the quality of goods and services. This can help increase exports and reduce imports, which can help reduce the CAD.
Conclusion:
Reducing the CAD is important for a country's economic stability and growth. The government can take various measures like devaluation of exchange rate, protectionism, reducing consumer spending and supply-side policies to reduce the CAD. However, these measures need to be implemented carefully, as they can have both positive and negative effects on the economy.
The Current Account Deficit (CAD) is the difference between a country's total exports and total imports of goods and services, along with net income and transfer payments. A high CAD can lead to a decline in a country's foreign exchange reserves, making it difficult to finance imports and pay off foreign debt. Here are some actions that can be taken by the government to reduce the CAD:
1. Devaluation of exchange rate:
Devaluation of the exchange rate refers to the reduction of the value of a country's currency in relation to other currencies. A devaluation makes a country's exports cheaper and imports more expensive, making it more attractive for foreign buyers to purchase domestic goods and services. This can lead to an increase in exports and a decrease in imports, which can help reduce the CAD.
2. Protectionism:
Protectionism refers to the implementation of policies that protect domestic industries from foreign competition. This can be done through various methods like imposing tariffs, quotas, and subsidies. Protectionism can help reduce imports and promote domestic production, which can help reduce the CAD.
3. High consumer spending:
High consumer spending can lead to an increase in demand for imported goods and services, which can contribute to the CAD. The government can try to reduce consumer spending through measures like increasing taxes and reducing subsidies, which can help reduce the CAD.
4. Supply-side policies to improve the competitiveness of domestic industry:
Supply-side policies can help improve the competitiveness of domestic industries by reducing the cost of production and improving the quality of goods and services. This can help increase exports and reduce imports, which can help reduce the CAD.
Conclusion:
Reducing the CAD is important for a country's economic stability and growth. The government can take various measures like devaluation of exchange rate, protectionism, reducing consumer spending and supply-side policies to reduce the CAD. However, these measures need to be implemented carefully, as they can have both positive and negative effects on the economy.
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With regard to the Current Account Deficit (CAD), which of the following actions can be taken by the government to reduce the deficit?1. Devaluation of exchange rate2. Protectionism3. High consumer spending4. Supply side policies to improve the competitiveness of domestic industrySelect the correct answer using the code given below:a) 1 and 3 onlyb) 2 and 4 onlyc) 1, 3 and 4 onlyd) 1, 2, 3 and 4Correct answer is option 'B'. Can you explain this answer?
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With regard to the Current Account Deficit (CAD), which of the following actions can be taken by the government to reduce the deficit?1. Devaluation of exchange rate2. Protectionism3. High consumer spending4. Supply side policies to improve the competitiveness of domestic industrySelect the correct answer using the code given below:a) 1 and 3 onlyb) 2 and 4 onlyc) 1, 3 and 4 onlyd) 1, 2, 3 and 4Correct answer is option 'B'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about With regard to the Current Account Deficit (CAD), which of the following actions can be taken by the government to reduce the deficit?1. Devaluation of exchange rate2. Protectionism3. High consumer spending4. Supply side policies to improve the competitiveness of domestic industrySelect the correct answer using the code given below:a) 1 and 3 onlyb) 2 and 4 onlyc) 1, 3 and 4 onlyd) 1, 2, 3 and 4Correct answer is option 'B'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for With regard to the Current Account Deficit (CAD), which of the following actions can be taken by the government to reduce the deficit?1. Devaluation of exchange rate2. Protectionism3. High consumer spending4. Supply side policies to improve the competitiveness of domestic industrySelect the correct answer using the code given below:a) 1 and 3 onlyb) 2 and 4 onlyc) 1, 3 and 4 onlyd) 1, 2, 3 and 4Correct answer is option 'B'. Can you explain this answer?.
With regard to the Current Account Deficit (CAD), which of the following actions can be taken by the government to reduce the deficit?1. Devaluation of exchange rate2. Protectionism3. High consumer spending4. Supply side policies to improve the competitiveness of domestic industrySelect the correct answer using the code given below:a) 1 and 3 onlyb) 2 and 4 onlyc) 1, 3 and 4 onlyd) 1, 2, 3 and 4Correct answer is option 'B'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about With regard to the Current Account Deficit (CAD), which of the following actions can be taken by the government to reduce the deficit?1. Devaluation of exchange rate2. Protectionism3. High consumer spending4. Supply side policies to improve the competitiveness of domestic industrySelect the correct answer using the code given below:a) 1 and 3 onlyb) 2 and 4 onlyc) 1, 3 and 4 onlyd) 1, 2, 3 and 4Correct answer is option 'B'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for With regard to the Current Account Deficit (CAD), which of the following actions can be taken by the government to reduce the deficit?1. Devaluation of exchange rate2. Protectionism3. High consumer spending4. Supply side policies to improve the competitiveness of domestic industrySelect the correct answer using the code given below:a) 1 and 3 onlyb) 2 and 4 onlyc) 1, 3 and 4 onlyd) 1, 2, 3 and 4Correct answer is option 'B'. Can you explain this answer?.
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