Cambridge International as and a level Economics Ebook

Figure 5.2 
Macroeconomic policies
118
Cambridge International AS Level Economics

---

Expenditure switching policies
An 
expenditure switching policy
is any action taken by 
a government that is designed to persuade purchasers 
of goods and services both at home and abroad to buy 
more of that country’s goods and services and less of 
the goods and services of other countries. Eff ectively 
this would include any policy measures designed 
to persuade domestic households and fi rms to buy 
domestically produced goods and services rather than 
imports. It would also include policy measures designed 
to persuade foreign households and fi rms to buy more 
exports from the domestic economy. Th
ese policies are 
not designed to reduce the total amount of spending 
in a country but to redirect or ‘switch’ spending to 
the country’s products rather than those produced in 
other countries. Th
e intended impact is a fall in import 
expenditure and a rise in export earnings. Th
e former 
will lead to a fall in the supply of a country’s currency 
on the foreign exchange market and the latter will lead 
to a rise in the demand for the country’s currency on 
the market. Both will lead to upward pressure on the 
exchange rate.
Expenditure dampening policies
An 
expenditure dampening or reducing policy
is 
any action taken by a government that is designed 
to reduce the total level of spending in an economy. 
Such a policy has two eff ects. One is a reduction in 
spending, which will mean that there will be fewer 
purchases of imported goods and services. Th
e second 
is that domestic producers will fi nd that their domestic 
market is ‘dampened’. As a result, they may try to make 
up for the decrease in domestic sales with an increase 
in sales abroad. Th
e overall eff ect, therefore, of an 
expenditure dampening policy may be a fall in imports 
and a rise in exports.