Expenditure-switching policies redirect spending from imports to domestic goods

Steps:

• Identify balance of payments deficit as excess imports over exports or outflows.
• Recall expenditure-switching policies alter relative prices to favor domestic over foreign goods.
• Evaluate options: seek measures that make imports costlier without reducing total spending.
• Select the option that directly impacts trade competitiveness via tariffs.

Why C is correct:

• Import tariffs raise the price of foreign goods, switching consumer expenditure toward domestic alternatives and reducing the trade deficit per the terms-of-trade effect.

Why the others are wrong:

• A reduces overall government spending, an expenditure-reducing policy that cuts total demand.
• B lowers disposable income, also expenditure-reducing by decreasing aggregate consumption.
• D attracts capital inflows via higher borrowing costs, addressing deficits through financial account adjustments, not trade switching.

Final answer: C