Match each balance of payments adjustment policy measure on the left with its corresponding policy classification and operational mechanism on the right.
- Devaluation of local currencyExpenditure-switching mechanism that lowers the foreign currency price of exports and raises the local currency price of imports.
- Open market sale of government securitiesExpenditure-reducing monetary tool that contracts the money supply and raises interest rates to suppress domestic aggregate demand.
- Imposition of protective import tariffsExpenditure-switching commercial tool that directly inflates the domestic price of foreign goods to discourage importation.
- Increase in personal and corporate income tax ratesExpenditure-reducing fiscal tool that curbs disposable income, thereby suppressing aggregate expenditure on imports.
Answer
Devaluation pairs with the expenditure-switching mechanism altering relative import/export prices; open market sales pair with the expenditure-reducing monetary tool contracting money supply; tariffs pair with the expenditure-switching commercial tool raising foreign good prices; and tax rate hikes pair with the expenditure-reducing fiscal tool curbing disposable income.
The correct pairings accurately reflect how each policy operates to correct a balance of payments deficit: Devaluation lowers export prices abroad while making imports costlier at home (expenditure-switching exchange rate policy); open market sales reduce commercial bank reserves and money supply (expenditure-reducing monetary policy); tariffs directly increase import costs to redirect spending to local substitutes (expenditure-switching commercial policy); and higher income taxes reduce household disposable income and spending power (expenditure-reducing fiscal policy).
Step-by-Step Solution
Key Concept
Classification and Mechanisms of Balance of Payments Adjustment Policies
Estimated Time:1m 30s