Which of the following can reduce the deficit in Balance of Payments 1 Reducing import custom duties...........

Economic Affairs Balance of Payments

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Which of the following can reduce the deficit in Balance of Payments?

1. Reducing import custom duties

2. Restrictive monetary policy

3. Appreciation of domestic currency

Select the correct answer using the code given below.

1 and 3 only

2 and 3 only

2 only

1 and 2 only

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Explanation:

Balance of payments summarizes an economy's transactions with the rest of the world for a specified time period. To correct deficit in BoP, a country will have to take steps which would:

(a) attract more foreign investment
(b) increase exports and decrease unnecessary imports
1. is not correct as Reducing import duty would lead to increase in imports and hence would lead to more deficit in BoP.
2. is correct as restrictive monetary policy(lower money supply) would lead to fall in prices of goods in country which would make exports competitive in international market.
3. is not correct as Appreciation of increase in value of domestic currency would make exports less competitive.