Expansionary fiscal policy reduces current account surplus by boosting imports

Steps:

• Current account surplus reflects exports exceeding imports; reducing it requires increasing imports or decreasing exports.
• A decrease in direct taxes raises disposable income for households.
• Higher disposable income stimulates consumption spending.
• Increased consumption raises demand for imported goods, widening the import bill and shrinking the surplus in the short run.

Why A is correct:

• Direct tax cuts are expansionary fiscal policy, increasing aggregate demand and imports (per the income effect in open economy models), directly reducing the current account surplus.

Why the others are wrong:

• B: Easing regulations attracts FDI, improving the capital account but not directly impacting current account trade flows in the short run.
• C: Lowering import duties makes imports cheaper, potentially increasing them, but this trade liberalization effect is slower and less immediate than fiscal stimulus.
• D: Raising import duties discourages imports, worsening the surplus by further reducing the import bill.

Final answer: A