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 the following steps:

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

Statement 1 is incorrect: Reducing import duty would lead to an 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 a fall in prices of goods and services in the country which would make exports 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.