Contractionary policies help correct a balance of payments deficit by

Question

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Contractionary policies, such as reducing government spending or increasing taxes, lead to lower domestic incomes and reduced demand for goods and services, including imports. This helps correct a balance of payments deficit by reducing the amount of money leaving the country to buy imports, while increasing the amount of money entering the country from exports. Option D correctly describes the effect of contractionary policies on domestic incomes and demand for imports. Option A is incorrect because lowering domestic incomes would decrease demand for imports rather than raising it. Option B is incorrect because raising domestic incomes would likely increase demand for imports rather than lowering it. Option C is incorrect because raising both domestic incomes and demand for imports would not correct a balance of payments deficit. Option E is incorrect because it describes the effect of expansionary policies, not contractionary policies.

Contractionary Policies Help Correct a Balance of Payments Deficit by