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Difficulty: EasyBalance of Payments Disequilibrium and Adjustment Measures

Match each balance of payments adjustment measure to its correct policy category or description.

  • Currency DevaluationExpenditure-switching policy that alters relative prices of domestic and foreign goods
  • Increase in Direct Income TaxExpenditure-reducing policy that lowers disposable income and aggregate demand
  • Import Quota ImpositionDirect commercial control policy that physically restricts the quantity of imports

Answer

Currency Devaluation matches Expenditure-switching policy; Increase in Direct Income Tax matches Expenditure-reducing policy; Import Quota Imposition matches Direct commercial control policy.
Currency devaluation is an expenditure-switching policy because it alters relative prices to divert spending from imports to home-produced goods. Increasing direct taxation is an expenditure-reducing policy because it lowers disposable income and aggregate demand. An import quota is a direct commercial control because it places a legal quantitative ceiling on imports.

Step-by-Step Solution

1
Analyze Currency Devaluation
Devaluation alters relative prices by raising foreign currency exchange costs for domestic buyers while lowering foreign price of home exports.
Measures altering price ratios to shift demand between foreign and home goods are expenditure-switching policies.
2
Analyze Increase in Direct Income Tax
Higher taxation lowers households' disposable income, compressing overall national expenditure including import demand.
Measures aimed at dampening aggregate domestic expenditure and demand are expenditure-reducing policies.
3
Analyze Import Quota Imposition
A quota sets a legal quantity restriction on imported products entering the home market.
Administrative rules directly controlling trade volumes constitute direct commercial controls.

Key Concept

Balance of Payments Adjustment Policies
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Topics

Balance of Payments Disequilibrium and Adjustment Measures

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