Practise distinguishing policies that redirect spending to domestic output from those that reduce total spending and evaluating each under elasticity and employment conditions.
A country has a deficit on the current account of the balance of payments. The government can try to reduce this deficit by using either an expenditure-switching policy or an expenditure-reducing policy.
Under which conditions will an expenditure-reducing policy be more successful than an expenditure-switching policy?
price elasticity
of demand for
imports
price elasticity
of demand for
exports
marginal
propensity to
import
0.2
0.2
0.1
0.2
0.2
0.4
0.6
0.2
0.1
0.6
0.6
0.4
B