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.Increase government spending
II.Increase consumption taxes
III.Increase income taxes

Question

Quizplus · Accepted Answer

The absorption approach suggests that to improve a trade deficit, a country needs to reduce its domestic absorption (consumption + investment + government spending). Increasing consumption taxes (II) and income taxes (III) can reduce domestic consumption, thereby improving the trade deficit. Increasing government spending (I) would have the opposite effect.

Assume That a Country Is at Full Employment and Wants