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Which of the following steps can help to reduce the Current Account Deficit?
1. Devaluation of the currency
2. Imposition of higher taxes on imports
3. Reducing the interest rate
4. Liberalization of FDI norms
1. Devaluation of the currency
2. Imposition of higher taxes on imports
3. Reducing the interest rate
4. Liberalization of FDI norms
Select the correct answer using the code given below:
- a)1, 2 and 3 only
- b)2 and 3 only
- c)1, 2 and 4 only
- d)1, 2, 3 and 4
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
Which of the following steps can help to reduce the Current Account De...
The current account deficit is a measurement of a country's trade where the value of the goods and services it imports exceeds the value of the products it exports. The current account includes net income, such as interest and dividends, and transfers, such as foreign aid. However, these components make up only a small percentage of the total current account. The current account represents a country's foreign transactions and, like the capital account, is a component of a country's balance of payments (BOP).
- If there is a devaluation of the currency, the price of imported goods increases and therefore, the quantity demanded of imports falls. Exports will become cheaper, and there will be an increase in the number of exports. So, statement 1 is correct.
- The imposition of higher taxes on imports will reduce the demand for the imported goods and thus helps to balance CAD. So, statement 2 is correct.
- Higher interest rates will increase the cost of debt and mortgage repayments and leave people with less money to spend. Therefore, this will reduce their consumption of imports, improving the current account. So, reducing the interest rate will increase the supply of money in the market and demand will increase. which can affect the CAD negatively. So, statement 3 is not correct.
- Foreign direct investment (FOI) inflows reduce the current account deficit and also the external financing needs. Lifting restrictions on FOI inflow will continue to increase the stability of sources funding the current account deficit So, statement 4 is correct.
Therefore, the correct answer is (c).
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Which of the following steps can help to reduce the Current Account De...
Devaluation of the currency:
- Devaluation of the currency can help reduce the current account deficit by making exports cheaper and imports more expensive.
- This can lead to an increase in exports and a decrease in imports, ultimately improving the trade balance.
Imposition of higher taxes on imports:
- By imposing higher taxes on imports, the government can discourage the consumption of imported goods.
- This can help reduce the current account deficit by decreasing the demand for foreign goods and promoting domestic production.
Liberalization of FDI norms:
- Liberalizing foreign direct investment (FDI) norms can attract more foreign investments into the country.
- This can lead to an increase in capital inflows, which can help finance the current account deficit.
- Additionally, FDI can stimulate economic growth and create job opportunities, further improving the country's overall economic outlook.
Therefore, a combination of devaluation of the currency, imposition of higher taxes on imports, and liberalization of FDI norms can help reduce the current account deficit by improving the trade balance, reducing the demand for imported goods, and attracting foreign investments.
- Devaluation of the currency can help reduce the current account deficit by making exports cheaper and imports more expensive.
- This can lead to an increase in exports and a decrease in imports, ultimately improving the trade balance.
Imposition of higher taxes on imports:
- By imposing higher taxes on imports, the government can discourage the consumption of imported goods.
- This can help reduce the current account deficit by decreasing the demand for foreign goods and promoting domestic production.
Liberalization of FDI norms:
- Liberalizing foreign direct investment (FDI) norms can attract more foreign investments into the country.
- This can lead to an increase in capital inflows, which can help finance the current account deficit.
- Additionally, FDI can stimulate economic growth and create job opportunities, further improving the country's overall economic outlook.
Therefore, a combination of devaluation of the currency, imposition of higher taxes on imports, and liberalization of FDI norms can help reduce the current account deficit by improving the trade balance, reducing the demand for imported goods, and attracting foreign investments.
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Which of the following steps can help to reduce the Current Account Deficit?1. Devaluation of the currency2. Imposition of higher taxes on imports3. Reducing the interest rate4. Liberalization of FDI normsSelect the correct answer using the code given below:a)1, 2 and 3 onlyb)2 and 3 onlyc)1, 2 and 4 onlyd)1, 2, 3 and 4Correct answer is option 'C'. Can you explain this answer?
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