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/(s) can help in reducing the current account deficit?
✓ Correct answer: d) 1 and 3
ExplanationStatement 1 is correct: Devaluation makes a coun- try’s exports cheaper for foreigners and its imports more expensive.This can lead to an increase in export volumes and a decrease in import volumes, which can improve the balance of trade (the difference between exports and imports of goods).An improved trade balance can help reduce the current account deficit.Statement 2 is incorrect : Reducing export subsidies can make a country’s exports less competitive internationally, potentially decreasing export volumes and worsening the current account deficit.Statement 3 is correct : While FDI and FII inflows are re- corded in the capital account, they can indirectly affect the current account.Increased FDI can boost domestic produc- tion capacity, leading to higher exports.FDI and FII inflows can strengthen the domestic currency, making imports cheaper and potentially widening the CAD.278
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