Currency depreciation improves trade balance via price effects

Steps:

• Persistent current account deficit means imports exceed exports, needing policy to boost exports or curb imports.
• Low unemployment limits contractionary policies that risk job losses; focus on expansionary or trade-specific options allowing inflation.
• Managed floating rate enables currency depreciation to adjust trade competitiveness without fiscal/monetary tightening.
• Evaluate: Depreciation enhances net exports, stimulates demand at full employment (causing inflation), unlike others that either worsen deficit or raise unemployment.

Why A is correct:

• Depreciation lowers export prices and raises import prices abroad/domestically (per purchasing power parity), improving current account without reducing aggregate demand that affects jobs.

Why the others are wrong:

• B: Higher direct taxation cuts disposable income, reducing imports but contracting economy and raising unemployment.
• C: Higher import tariffs reduce imports but risk trade retaliation, harming export jobs and potentially increasing unemployment.
• D: Higher interest rates attract capital inflows, appreciating currency and worsening deficit while slowing growth to raise unemployment.

Final answer: A