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Question

Which of these measures will reduce deficit on the current account of the balance of payments through the use of fiscal policy?

A
Increase in Direct Taxation
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B
Imposing import quota
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C
Raise interest rates
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D
Raise custom duty
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Solution

The correct option is A Increase in Direct Taxation
Employing the tool of increased direct taxation, will lead to consumer disposable income falling. Thus , the consumers will reduce consumption overall. This will also include a reduction spending on imports and thus the amount of money flowing out of the country is likely to reduce, leading to a reducing current account deficit. The other mentioned tools would also serve to be useful, however, they are not a part of fiscal policy.

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