Fiscal contraction worsens trade balance via export reduction

Steps:

• Increasing indirect taxes raises consumer prices, curbing spending and aggregate demand.
• Abolishing agricultural subsidies hikes farmers' costs, cutting output and export volumes.
• Lowering the income tax threshold boosts revenue but slashes disposable income, further dampening consumption.
• Net effect: domestic demand falls (lowering imports), but export drop from agriculture dominates, expanding BoP deficit.

Why B is correct:

• Balance of payments deficit rises as reduced agricultural exports (per current account definition) outpace import decline from lower AD.

Why the others are wrong:

• A: Higher indirect taxes elevate production costs, fueling cost-push inflation rather than reducing it.
• C: Tax hikes and subsidy cuts raise revenue while trimming spending, shrinking the budget deficit.
• D: Contractionary policies lower AD, decreasing nominal GDP.

Final answer: B