Expansionary fiscal policy and devaluation to address internal and external imbalances

Steps:

• High unemployment requires boosting aggregate demand through increased government spending.
• Balance of payments deficit needs improved export competitiveness via currency devaluation in a fixed rate system.
• Devaluation makes exports cheaper and imports costlier, enhancing the current account.
• Combining expansionary fiscal policy with devaluation targets both domestic output and external balance simultaneously.

Why A is correct:

• Additional government spending raises aggregate demand to lower unemployment, while devaluation boosts net exports to improve the current account, per the J-curve effect and Keynesian multiplier.

Why the others are wrong:

• B: Revaluation reduces export competitiveness, worsening the current account deficit.
• C: Reduced spending contracts aggregate demand, increasing unemployment.
• D: Reduced spending raises unemployment, and revaluation aggravates the current account deficit.

Final answer: A