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Macroeconomics II – The international economy

4.5 Policies to deal with a current account deficit

 Do nothing A floating exchange rate system will automatically deal
with the problem

 Devalue the The currency could be devalued (usually as a one off
currency sudden movement) or depreciated (usually more slowly) if
using a fixed (or dirty floating) exchange rate system.

 Deflate the Reduce the demand for imports. May result in
economy unemployment.

 Protectionism e.g. import controls

 Supply side Domestic firms could be helped to make them more
policies competitive.

Illustrations and further practice

Now try TYUs 6 to 9 from Chapter 5

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