ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A a decrease in its rate of income tax
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B a decrease in its tariffs
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C an increase in its level of employment
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D an increase in its subsidies to exporters
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Detailed explanation-1: -Measuring the current account A deficit then means that the country is importing more goods and services than it is exporting-although the current account also includes net income (such as interest and dividends) and transfers from abroad (such as foreign aid), which are usually a small fraction of the total.
Detailed explanation-2: -A BoP deficit can be corrected through an official reserve sale which denotes the sale of foreign exchange by the Reserve Bank. The monetary authorities of a country are the financiers when any deficit arises in the country’s balance of payment.
Detailed explanation-3: -Government can reduce substantial current account deficit by increasing exports or by decreasing imports which can be through import restrictions, quotas, or duties or by subsidizing exports. Manipulating of exchange rate for cheaper exports tends to increase balance of payments through devaluing of domestic currency.
Detailed explanation-4: -So, what happens if the current account deficit keeps worsening? If the current account widens, foreign investment outflows could be severe and the rupee could depreciate further. For the currency to be stable, it is important to keep the current account deficit in check.