Increase in direct tax
As direct tax increases, consumer's disposable income decreases. As disposable income decreases, people would demand for less imports. This would aid with improving the current account deficit. As demand for import decreases, it would reduce the supply of currency in the currency market, pushing the exchange rate back to the initial fixed exchange rate and removes the downward pressure.


Answer: 

Increase in interest rate
As the interest rate increase, the cost of borrowing increases, returns on domestic borrowing increases and the returns on foreign investment increases. As the cost of borrowing increases, people would borrow less money, and as returns on domestic savings increases, people would rather save their money in the bank. People have less money to spend, therefore they would demand for less imports, this would help improve the current account deficit. 

The returns on foreign investment increases and this encourages foreign investment as well as hot money flow. In order to invest or store money, local currency is demanded and this pushes the demand curve to the right.

Tariff on imports decrease
Price of imports decrease
Quantity of imports increase
Supply of currency in foreign market increase
Value of currency depreciate
Thus, reduction in upward pressure and reduction in current account surplus are both achieved.


Answer: 

Subisidies for exporters decrease
Cost of production increase
Price of exports increase
Quantity of export decrease
Demand for currency in foreign market decrease
Value of currency depreciate
Thus, reduction in upward pressure and reduction in current account surplus are both achieved.

Decrease direct tax
Disposable income increase
Consumers buy more imports
Supply of currency increase
Reduce balance of payment surplus
Supply curve currency shift from S to S1 and upward pressure is being reduced


Answer: 

Decrease in interest rate
When there is a decrease in interest rate, the foreign investment will decrease, then inflow reduces and BOP surplus will be reduced. At the same times, the demand for currency will decrease due to lower foreign investment, the demand curve shift from D to D1, exchange rate is maintained and upward pressure is being reduced.

Increase in direct tax, 
Decrease disposable income
Decrease consumption and investment,
Decrease AD, 
Decrease RGDP,
Decrease national income,
Decrease spending on import,
current account deficit improved, 
Supply of currency falls,
Appreciation 


Answer: 

Increase in interest rates, 
Increase cost of domestic borrowing,
Increase return of domestic savings
Decrease consumption and investment,
Decrease AD, 
Decrease RGDP,
Decrease national income,
Decrease spending on import,
current account deficit improved, 
Supply of currency falls,
Appreciation 

When direct tax increases, it will only decrease consumer's purchasing power without causing inflation in price level because direct tax is a tax which cannot shift burden to consumer. As consumers' consumption and investment reduce due to lower purchasing power, AD will shift left and causes both PL and RGDP to fall. National income will therefore be reduced. The demand for imported goods will reduce as consumers now has lesser disposable income and this will reduce current account deficit.


Answer: 

When interest rate increases, the cost of borrowing and returns on saving will increase. This will lead to a reduction in consumption and investment. As consumers' consumption and investment reduce , AD will shift left and causes both PL and RGDP to fall. National income will therefore be reduced. The demand for imported goods will reduce as consumers now has lesser disposable income and this will reduce current account deficit.

2. Nicholas

3. Ming Hui