Monetary tightening attracts capital without price pressures

Steps:

• Identify balance of payments (BOP) deficit as excess outflows in current or capital accounts.
• Evaluate policies for reducing deficit via trade balance or capital flows.
• Assess inflation risk: Policies boosting demand or costs may inflate prices.
• Select option improving capital account without domestic overheating.

Why C is correct:

• Higher interest rates draw foreign capital inflows per interest rate parity, boosting capital account surplus and reducing overall BOP deficit without raising domestic prices (may even curb inflation via tighter money supply).

Why the others are wrong:

• A: Devaluation raises import prices, fueling cost-push inflation while improving trade balance.
• B: Decreased import quotas restrict supply, causing domestic shortages and higher prices (inflationary).
• D: Decreased import tariffs lower import costs, increasing import volume and worsening current account deficit.

Final answer: C