Expenditure-Reducing Policies Reduce Domestic Spending to Fix Trade Deficits

Steps:

• Define balance of trade deficit as exports less than imports, requiring policies to boost exports or cut imports.
• Classify expenditure-reducing policies as those that lower aggregate demand via fiscal contraction, like higher taxes.
• Assess options: identify which directly reduces spending without switching expenditure between domestic and foreign goods.
• Confirm B fits by reducing consumer and business spending power.

Why B is correct:

• Increased direct taxation lowers disposable income, reducing domestic consumption and imports per the absorption approach (trade balance = output - absorption).

Why the others are wrong:

• A: Depreciation switches expenditure by making exports cheaper and imports costlier, not reducing total spending.
• C: Tax incentives for exporters boost export supply without cutting domestic absorption.
• D: Protectionist tariffs reduce imports by raising their price, switching demand to domestic goods.

Final answer: B