Expansionary fiscal policy and currency appreciation reduce surplus while boosting tax revenue via growth

Steps:

• Identify goal: Raise income tax revenue (via broader base from growth) and reduce current account surplus (exports > imports).
• Decreasing income tax stimulates consumption and GDP growth, expanding the tax base to increase revenue despite lower rates (Laffer curve effect).
• Raising Yuan value appreciates currency, making exports costlier and imports cheaper, narrowing net exports and surplus.
• Combine effects: Growth raises revenue; appreciation curbs exports—both reduce surplus.

Why A is correct:

• Aligns with open-economy macro: Expansionary policy (lower taxes) boosts imports and GDP (CA = NX + net transfers; higher Y reduces CA surplus), while appreciation directly cuts NX per exchange rate pass-through.

Why the others are wrong:

• B: Subsidies and lower taxes expand economy but directly cut tax revenue without currency adjustment to reduce surplus.
• C: Higher taxes contract economy (lowers revenue base) and depreciation boosts exports, increasing surplus.
• D: Tariffs raise import costs (worsens surplus); lower taxes cut revenue directly.

Final answer: A