Question

Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit?

Answer 1

There are two policies used to reduce the current account deficit.

1. Expenditure switching policy

2. Expenditure reducing policy

Expenditure switching policy

In this policy, they try to switch the expenditure pattern from one good to another. More clearly, through devaluation domestic goods become more cheaper and imported goods will become more expensive. As a result of this, people will switch there expenditure on imported goods to domestic goods. This is how through expenditure switching policy the expenditure of consumers or buyers switch from one good to another or imported to domestic good.

Expenditure reducing policy

Through this policy government aim to reduce expenditure on imports and thereby to decrease the demand for imported goods. This is done by both Fiscal and monetary policies. From the side of fiscal policies, it is done by increasing taxes and reducing government spending. And from the side of monetary policies, interest rates will be increased. With the effect of both these policies. aggregate demand will fall.