Question

Q. Which of the following methods can be used to reduce the 'Current Account Deficit (CAD)' by the government?

Select the correct answer from the codes given below:

• A.
  1 and 2 only
• B.
  2 and 3 only
• C.
  1 and 3 only
• D.
  1, 2 and 3

Answer 1

The correct option is B

2 and 3 only
Explanation:

To control the deficit, a country can take following steps:

• Attract more foreign investment
• Increase exports
• decrease unnecessary imports

Statement 1 is incorrect: Reducing import duty would lead to increase in imports and hence would lead to higher current account deficit.

Statement 2 is correct: Restrictive monetary policy (lower money supply) would lead to fall in prices of goods and services in the country. In short, it will reduce the inflation. Now, if inflation is less in an economy, the purchasing power of the money increases. Thus, it makes the exports cheaper and competitive in the international market.

Statement 3 is correct: Devaluation of domestic currency would make exports more competitive and improve the current account position due to the reduced imports and increase in exports.