| Chapter 15 Outline |
| IX. POLICIES TO REDUCE THE CURRENT ACCOUNT DEFICIT |
| A. Increased U.S. Competitiveness |
| 1. Decreasing price and increasing quality could cause U.S. goods to become more competitive, increasing U.S. exports and reducing U.S. imports, reducing the U.S. trade deficit. |
| B. Contractionary Monetary and Fiscal Policy |
| 1. By applying contractionary monetary and fiscal policies, the U.S. inflation rate could be reduced, thereby increasing the competitiveness of American goods in world markets. |
| 2. Because of the possibility of reducing output below the full employment level, many economist favor combining a contractionary fiscal policy with an expansionary monetary policy. |
| a. The combination of policies would presumably maintain output at the full
employment level while reducing the interest rate. |
| C. Imposition of Trade Restrictions |
| 1. While the deficit on the current account could be reduced by the use of various trade restrictions, this would also mean sacrificing some of the advantages of specialization, thereby reducing living standards. |
| a. Other problems with trade restrictions could arise because of the possibility of retaliation by other countries, and the fact that such restrictions do little to increase the competitiveness of American goods in world markets. |
| D. Depreciation of the Dollar |
| 1. Some economists argue that the intervention of central banks has prevented the dollar from depreciating as much as it should. |
| a. The dollar has depreciated since 1985, and it is not clear that it needs to depreciate more; in the absence of such information, central banks should proceed very cautiously with measures designed to promote further depreciation. |