An economy facing an external deficit attempts to alter price ratios so that resident dema… — JAMB UTME

An economy facing an external deficit attempts to alter price ratios so that resident demand is diverted from foreign products toward domestically produced goods and services. Which of the following policy actions best illustrates this expenditure-switching adjustment strategy?

Imposing protective import tariffs and devaluing the domestic currencyAnswer
B
Increasing commercial bank cash reserve requirements to restrict credit extension
C
Revaluing the domestic currency relative to foreign trading currencies
D
Raising direct income tax rates to curtail private disposable income

Answer

Imposing protective import tariffs and devaluing the domestic currency is the expenditure-switching policy.

The combination of currency devaluation and protective tariffs alters relative price ratios by making foreign goods more expensive relative to domestic substitutes, effectively switching consumer demand toward domestic production.

Step-by-Step Solution

Identify the objective of expenditure-switching adjustment measures

Expenditure-switching policies aim to change relative prices so domestic consumers switch spending from foreign goods to local alternatives, and foreign consumers spend more on domestic exports.

Balance of payments adjustments rely on either reducing overall spending level (expenditure-reducing) or altering relative prices of foreign vs domestic goods (expenditure-switching).

Evaluate the options against the expenditure-switching criteria

Devaluation and import tariffs directly raise import prices relative to domestic goods, driving spending toward local output.

Commercial policy (tariffs, quotas) and exchange rate adjustments (devaluation) are classic expenditure-switching instruments.

Key Concept

Expenditure-Switching vs. Expenditure-Reducing Adjustment Policies

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