If Canada runs international balance of payment (BOP) deficit (excluding official financial account), the BOC can ____________ to balance the deficit. Group of answer choices 1buy foreign currency. 2sell foreign currency. 3implement expansionary monetary policy 4implement contractionary monetrary policy.

If Canada runs international balance of payment (BOP) deficit (excluding official financial account), the BOC can ____________ to balance the deficit.
Group of answer choices
1buy foreign currency.
2sell foreign currency.
3implement expansionary monetary policy
4implement contractionary monetrary policy.

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Answer

• 4 implement contractionary monetrary policy.
  Explanation:
  BOP deficit occurs when imports’ value is greater than exports’ value. The way to reduce deficit in balance of payments is by adopting monetary and fiscal policies that reduce aggregate expenditure/aggregate demand. This involves reduction in imports while increasing exports. This can be achieved by reducing availability of credit, as well as increase in direct taxes such as income tax. By increasing taxes, disposable income decreases which implies that the consumers will thus demand less goods than before which will eventually decrease demand for imports as well, correcting BOP deficit.