Assume that a country is at full employment and wants to improve its trade deficit by
Devaluing its currency.Using the absorption approach which of the following methods will improve the trade deficit?
I.Decrease government spending
II.Decrease consumption taxes
III.Decrease income taxes
A) I only
B) II only
C) II and III
D) I, II, and III

Question

Quizplus · Accepted Answer

The absorption approach suggests that trade deficits occur when domestic absorption (i.e. consumption and investment) exceeds national output. By decreasing government spending, the country can reduce its domestic absorption and lower overall demand for imports, which can lead to an improvement in the trade deficit. Decreasing consumption or income taxes may potentially increase domestic absorption and overall demand, which could offset any benefit from devaluing the currency. Therefore, only option I is the best choice for improving the trade deficit in this scenario.

Assume That a Country Is at Full Employment and Wants