A central bank aims to address a persistent balance of payments deficit by employing an ex… — JAMB UTME

A central bank aims to address a persistent balance of payments deficit by employing an expenditure-reducing monetary policy measure to lower overall domestic demand. Which of the following policy actions achieves this objective?

Raising the discount rate and selling government securities in open market operationsAnswer
B
Lowering cash reserve requirements to encourage commercial bank lending to export industries
C
Imposing ad valorem tariffs and strict quantitative import quotas on foreign goods
D
Devaluing the domestic currency relative to foreign exchange rates

Answer

Raising the discount rate and selling government securities in open market operations

Raising the discount rate and selling government securities in open market operations contracts the money supply and restricts bank credit. This lowers total domestic aggregate expenditure, reducing income levels and domestic demand for imported goods to help restore balance of payments equilibrium.

Step-by-Step Solution

Identify the policy category required by the scenario

The target policy is an expenditure-reducing measure designed to contract total aggregate demand.

Balance of payments adjustment policies are categorized into expenditure-reducing (contractionary fiscal/monetary tools) and expenditure-switching (devaluation, tariffs, exchange controls) measures.

Evaluate the monetary policy options against expenditure-reducing criteria

Raising the discount rate and conducting open market sales contract liquidity and credit availability.

Higher interest rates and reduced credit restrain consumer spending and investment, suppressing aggregate domestic demand and lowering import consumption.

Key Concept

Distinction between expenditure-reducing and expenditure-switching policies for balance of payments adjustment

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