Which of the following steps can be taken as immediate measures to reduce the Current Account Deficit (CAD)?
1. Short-term external borrowing
2. Imposing temporary restrictions on capital outflows
3. Introducing supply side policies to improve competitiveness of domestic industry and exports.
4. Devaluation of exchange rate.
Select the correct answer using code given below:
(a) 1 and 2 only
(b) 3 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Explanation Item 1 and 2 are not correct:Short-term external borrowing does not directly address the current account deficit. It is a financing measure often used to meet immediate capital needs, but it does not reduce the underlying trade imbalance or current account issues. Imposing temporary restrictions on capital outflows is a capital account measure, not a current account measure. It might help with foreign exchange reserves but is unrelated to reducing the current account deficit.
Item 3 and 4 are correct:A current account deficit occurs when the value of imports (of goods/services/inv. incomes) is greater than the value of exports. Policies to reduce a current account deficit involve:
. Devaluation of exchange rate (make exports cheaper – imports more expensive)
. Reduce domestic consumption and spending on imports (e.g. tight fiscal policy/higher taxes)
. Supply side policies to improve the competitiveness of domestic industry and exports.
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