Question

Consider the following actions which the government can take :

1. Devaluing the domestic currency.

2. Reduction in the export subsidy.

3. Adopting suitable policies which attract greater FDI and more funds from FIIs.

Which of the above action/actions can help in reducing the current account deficit ?

(a) 1 and 2 (b) 2 and 3 (c) 3 only (d) 1 and 3

Answer 1

(d) Current account deficit is excess of imports over exports. Policies favouring FDI and FII will reduce the deficit. Also if the domestic currency is devalued, export would become cheaper which will create additional demand for countries products in the world markets. Any reduction in export subsidy is dangerous as the countries goods will become costlier and exports would fall.