Currency Depreciation Boosts Exports and Curbs Imports

Steps:

• Identify the current account deficit as stemming from excess imports over exports.
• Recall that depreciation makes domestic goods cheaper abroad and foreign goods costlier domestically.
• Link this to increased export competitiveness and reduced import demand.
• Conclude that net exports rise, shrinking the deficit.

Why A is correct:

• Depreciation lowers the real exchange rate, per the Marshall-Lerner condition, improving the trade balance by boosting exports and reducing imports.

Why the others are wrong:

• B: Cutting export subsidies raises production costs, making exports less competitive and worsening the deficit.
• C: Lower income taxes increase domestic spending, boosting imports and enlarging the deficit.
• D: Reducing import tariffs lowers import prices, encouraging more imports and increasing the deficit.

Final answer: A