BoP: Supply-side Policies and the Current Account Deficit

Question 1

What does the current account measure?

Answer 1

Trade in goods and services, income from abroad, and transfers

Question 2

What occurs during a current account deficit?

Answer 2

A country imports more than it exports

Question 3

What are supply-side policies aimed at improving?

Answer 3

The productive capacity of an economy

Question 4

Why are supply-side policies critical?

Answer 4

They address long-term structural issues, such as reducing a persistent current account deficit

Question 5

How do supply-side policies help reduce a current account deficit?

Answer 5

By improving the price and quality competitiveness of exports

Question 6

What is price competitiveness?

Answer 6

The ability to sell goods at lower prices compared to competitors

Question 7

How do low exchange rates impact exports?

Answer 7

They make exports cheaper for foreign buyers, increasing demand

Question 8

What is the effect of low interest rates on export-oriented industries?

Answer 8

Encourages borrowing and investment, increasing production for sale abroad

Question 9

Why is controlled inflation important for price competitiveness?

Answer 9

It ensures domestic goods remain affordable

Question 10

What is quality competitiveness?

Answer 10

The ability to compete based on the quality of goods and services

Question 11

What factors contribute to quality competitiveness?

Answer 11

• Innovation in product design and technology
• Improvements in manufacturing excellence
• Research & Development (R&D)
• Strategic marketing

Question 12

Fill in the blank: Supply-side policies focus on improving the _______ and quality competitiveness of exports.

Answer 12

price

Question 13

True or False: Innovation is essential for fostering improvements in export quality.

Answer 13

True

Question 14

What role does strategic marketing play in exports?

Answer 14

Helps them stand out in competitive global markets

Question 15

What is the government’s role in infrastructure development?

Answer 15

The government should invest in physical infrastructure, like transport, telecommunications, and energy, to enhance the efficiency of industries.

This investment helps create a foundation for economic growth.

Question 16

What are regulatory reforms in the context of supply-side policies?

Answer 16

Deregulation can encourage businesses to innovate and become more competitive, including reducing trade barriers or streamlining business regulations.

These reforms aim to create a more favorable business environment.

Question 17

How can the government encourage private sector investment?

Answer 17

By implementing policies that incentivise private-sector investment in R&D and improving productivity through training and education.

This enhances the long-term competitiveness of the economy.

Question 18

What is the effect of effective supply-side policies on Long-run Aggregate Supply (LRAS)?

Answer 18

They lead to an outward shift in the LRAS curve, representing an increase in the economy’s potential output.

This indicates that the economy can produce more goods and services.

Question 19

What is an example of how supply-side policies can increase productivity?

Answer 19

Increased productivity from improved technology or education allows more goods and services to be produced without inflating prices.

This enhances efficiency and competitiveness.

Question 20

What is the impact of supply-side policies on domestic reliance on imports?

Answer 20

They help reduce reliance on imports as the domestic economy becomes more self-sufficient and competitive.

This can improve the trade balance.

Question 21

What is the relationship between supply-side policies and Short-run Aggregate Supply (SRAS)?

Answer 21

Supply-side policies can shift the SRAS curve right, reflecting improved production efficiency and lower costs for businesses.

This boosts export capacity.

Question 22

How does an increase in exports affect Aggregate Demand (AD)?

Answer 22

As exports increase, demand for domestic goods rises, shifting the AD curve rightward.

This can lead to higher national income and greater economic growth.

Question 23

What happens to the equilibrium after implementing supply-side policies?

Answer 23

The new equilibrium is at higher output (Y₁) with moderate price inflation (P₁).

This reflects the overall impact of LRAS, SRAS, and AD shifts.

Question 24

Fill in the blank: Effective supply-side policies improve the economy’s _______.

Answer 24

[potential output]

Question 25

True or False: Supply-side policies only affect Long-run Aggregate Supply (LRAS).

Answer 25

False ## Footnote They also influence Short-run Aggregate Supply (SRAS) and Aggregate Demand (AD).

Question 26

What is a key critique of supply-side policies regarding their effectiveness over time?

Answer 26

Supply-side policies take time to produce results ## Footnote For example, improving productivity through education or infrastructure development may take years to manifest in increased exports or reduced imports.

Question 27

What immediate interventions may be necessary to address persistent current account deficits?

Answer 27

Devaluation and direct controls ## Footnote These interventions can provide quick adjustments in the short term.

Question 28

How may supply-side policies potentially increase inequality?

Answer 28

Tax cuts for corporations or deregulation may disproportionately benefit higher-income individuals or large firms ## Footnote This exacerbates income inequality and could lead to social and economic challenges.

Question 29

What social consequence can arise from increased income inequality due to supply-side policies?

Answer 29

Undermining public support for these policies ## Footnote As wealth distribution becomes more uneven, social tensions may increase.

Question 30

What budgetary concern arises from implementing supply-side reforms?

Answer 30

Increased government spending, larger budget deficits, and rising public debt ## Footnote These concerns could raise issues about fiscal sustainability.

Question 31

Fill in the blank: Supply-side policies may require significant public investment in _______.

Answer 31

infrastructure, education, and R&D ## Footnote This investment is often necessary for these policies to be effective.

Question 32

What is the need for a comprehensive strategy in addressing a current account deficit?

Answer 32

To consider supply-side policies alongside demand-side factors, social equity, environmental sustainability, and fiscal responsibility ## Footnote A comprehensive strategy ensures that all relevant aspects of the economy are addressed.

Question 33

What are demand-side factors that influence consumption and investment?

Answer 33

Fiscal and monetary policies ## Footnote These policies can stimulate or dampen economic activity, impacting the current account.

Question 34

Why is addressing social equity important in economic reform?

Answer 34

To ensure broad-based support for reform ## Footnote Inequality can lead to social unrest and hinder economic progress.

Question 35

What does environmental sustainability ensure in economic growth?

Answer 35

That growth is environmentally responsible ## Footnote Sustainable practices help protect resources for future generations.

Question 36

What is the significance of fiscal responsibility in government spending?

Answer 36

To avoid excessive public debt ## Footnote Managing debt levels is critical for long-term economic stability.

Question 37

What is a long-term strategy for reducing a current account deficit?

Answer 37

A multi-faceted approach that includes supply-side policies and macroeconomic strategies ## Footnote This ensures that all angles of the economy are considered.

Question 38

What is the focus on competitiveness in relation to exports?

Answer 38

Building quality-competitive exports through innovation, R&D, and strategic marketing ## Footnote This reduces reliance on imports and improves the current account balance.

Question 39

Why is the sustainability of policies important?

Answer 39

To ensure they contribute to long-term growth without exacerbating inequality or fiscal instability ## Footnote Sustainable policies maintain a healthy economy over time.

Question 40

What is a current account deficit?

Answer 40

Occurs when a country imports more than it exports, leading to a negative balance of trade ## Footnote A persistent deficit can indicate economic weaknesses.

Question 41

Define supply-side policies.

Answer 41

Policies designed to improve the efficiency and productivity of an economy’s factors of production ## Footnote These policies aim to increase economic output.

Question 42

What does Long-run Aggregate Supply (LRAS) represent?

Answer 42

The total output of an economy when all resources are fully employed ## Footnote LRAS reflects the economy's potential output.

Question 43

What is Short-run Aggregate Supply (SRAS)?

Answer 43

The total output of an economy in the short run, influenced by changes in production costs ## Footnote SRAS can fluctuate based on immediate economic conditions.

Question 44

What is price competitiveness?

Answer 44

The ability of a country's goods and services to compete based on their price relative to other nations ## Footnote Price competitiveness affects export performance.

Question 45

What is quality competitiveness?

Answer 45

The ability of a country’s goods and services to compete based on their quality, innovation, and design ## Footnote Quality can often allow products to command higher prices.