Depreciation and expansionary fiscal policy improve trade balance Steps:

• Identify deficit cause: exports < imports, needing boost to net exports.
• Note elastic export demand: lower export prices via depreciation raise total export revenue (elasticity >1).
• Depreciate exchange rate: cheapens exports (increases quantity/revenue) and raises import costs (curbs imports).
• Cut income tax: expands fiscal policy, raises domestic income/spending on home goods, supporting growth without worsening trade via higher rates.

Why D is correct:

• Depreciation leverages elastic demand to surge exports (Marshall-Lerner condition), while tax cut stimulates economy to enhance production without interest hikes that appreciate currency.

Why the others are wrong:

• A: Interest cut depreciates currency, but specified appreciation harms exports; unchanged tax misses stimulus.
• B: Interest hike appreciates currency (reduces exports); unchanged exchange blocks depreciation benefits.
• C: Tax hike contracts economy, potentially cutting imports but also exports and growth, offsetting depreciation gains.

Final answer: D