Improving current account deficit via export subsidies under Marshall-Lerner

Steps:

• Current account deficit indicates excess imports over exports, worsening trade balance.
• Marshall-Lerner condition holds: sum of export and import demand elasticities exceeds 1, so policies boosting export competitiveness improve the balance.
• Subsidizing domestic producers lowers production costs, making exports cheaper and more competitive internationally.
• This increases export volume and value, directly reducing the deficit without relying on currency changes.

Why D is correct:

• Subsidies shift supply curve rightward for domestic goods, increasing exports and improving trade balance per the absorption approach in open-economy macroeconomics.

Why the others are wrong:

• A: Increasing exchange rate appreciates currency, raising export prices and import affordability, worsening deficit.
• B: Reducing income tax boosts domestic demand, increasing imports and deepening deficit.
• C: Reducing primary tax (likely corporate) may encourage investment but primarily stimulates imports via higher income, not targeting exports.

Final answer: D