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Policies Which Stabilise the Current Account Balance
The Government possesses various policy tools, including fiscal, monetary, and supply-side measures, to tackle a current account deficit or stabilize the current account balance.
These options encompass:
- Inaction, allowing market dynamics in the foreign exchange market to naturally rectify the deficit.
- Adoption of expenditure-switching policies, such as:
- Imposition of protectionist measures to elevate import prices, prompting consumers to favor domestic products.
- Currency devaluation to heighten import costs, thereby encouraging domestic product consumption.
- Implementation of expenditure-reducing strategies, such as:
- Tax hikes to curtail consumer disposable income, leading to diminished spending on imports.
- Elevation of interest rates to mitigate borrowing, resulting in decreased import levels.
- Deployment of supply-side initiatives, including:
- Investment in education to augment productivity, rendering exports more competitive and appealing.
- Infrastructure enhancement to drive down costs for firms, rendering exports more competitive and appealing.
The utilization of any policy option or a blend thereof entails both benefits and drawbacks.
Question for Stabilisation PoliciesTry yourself: Which policy option aims to encourage domestic product consumption by raising import costs?View Solution
Advantages & Disadvantages of Policies Used to Tackle Current Account Deficits
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FAQs on Stabilisation Policies - Economics for GCSE/IGCSE - Year 11
| 1. How do stabilisation policies help in stabilising the current account balance? |  |
Ans. Stabilisation policies can help stabilise the current account balance by influencing the level of domestic demand, exchange rates, and interest rates. By implementing appropriate fiscal and monetary policies, a government can control inflation, reduce deficits, and encourage exports, all of which can help improve the current account balance.
| 2. What are some examples of stabilisation policies that can be used to stabilise the current account balance? | |
Ans. Examples of stabilisation policies include tightening fiscal policy (reducing government spending or increasing taxes), tightening monetary policy (increasing interest rates), implementing trade policies to promote exports, and encouraging foreign direct investment. These measures can help adjust the balance of payments and improve the current account balance.
| 3. How do exchange rates play a role in stabilising the current account balance? | |
Ans. Exchange rates can influence the current account balance by affecting the competitiveness of a country's exports and imports. A depreciation in the country's currency can make exports cheaper and imports more expensive, which can help improve the current account balance by increasing exports and reducing imports.
| 4. Why is it important to stabilise the current account balance? | |
Ans. Stabilising the current account balance is important because a persistent deficit can lead to a build-up of external debt, which can make a country vulnerable to economic crises. By maintaining a balanced current account, a country can ensure sustainable economic growth and stability in the long run.
| 5. How do stabilisation policies impact domestic economic growth? | |
Ans. Stabilisation policies can have both positive and negative impacts on domestic economic growth. While tightening fiscal and monetary policies may help improve the current account balance, they can also lead to lower domestic demand and slower economic growth. It is essential for policymakers to strike a balance between stabilising the current account balance and promoting economic growth.
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Dec 26, 2024 Last updated |
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