Question

what kind of fiscal policy can the government carry out in the case of surplus in the current account balance? Explain in detail how it affect the balance of payment

Answer 1

Answer

A current account surplus is a positive current account balance, indicating that a nation is a net lender to the rest of the world.

Thus, currently the exports exceed the imports. To reduce the net exports, the government can carry out an expansionary fiscal policy. With an expansionary fiscal policy, the money supply in the economy would increase, people would consume more goods. Thus, the imports of the country would rise.

This would eliminate the surplus in the current account.

This policy would decrease the surplus or may also lead to current account deficit. However, Balance of Payments will always be equal to zero as debit should always equal credit.