Stabilisation Policies (Cambridge (CIE) IGCSE Economics): Revision Note

Floating exchange rates act as a self-correcting mechanism

Over time a higher level of imports will end up depreciating the currency, causing imports to decrease (they are now more expensive) and exports to increase (they are now cheaper)

This improves the deficit 

There may be other external factors that prevent the currency from depreciating

It may take a long time for self-correction to happen and many domestic industries may go out of business in the interim

The longer it takes to self-correct, the more firms will delay investment in the economy

These are often successful in changing the buying habits of consumers, switching consumption from imports to consumption of domestically produced goods and services

This helps improve a deficit

Any protectionist policy often leads to retaliation by trading partners.

This may consist of reverse tariffs or quotas which will decrease the level of exports

This may offset any improvement to the deficit caused by the policy

Contractionary fiscal policy invariably reduces discretionary income, which leads to a fall in the demand for imported goods and improves a deficit

Contractionary fiscal policy also dampens domestic demand, which can cause output to fall

When output falls, GDP growth slows and unemployment may increase

Improves the quality of products and lowers the costs of production.

Both of these factors help the level of exports to increase, thus reducing the deficit

These policies tend to be long-term policies so the benefits may not be seen for some time

They usually involve government spending in the form of subsidies and this always carries an opportunity cost