1. an export subsidy under fixed exchange rates.
2. a general tax cut under fixed exchange rates.
3. a monetary expansion under either fixed or flexible exchange rates.
4. both 1 and 3 above.
Choose the option above that is correct.
Option 1 is the correct one. An export subsidy clearly increases the domestic current account balance under a fixed exchange rate. This implies that the current account balance of the rest of the world must decrease. Output and employment increase in the domestic economy at the expense of output and employment abroad. A monetary expansion will have the same effect on the current account balance under flexible exchange rates. Under fixed exchange rates, however, monetary expansion is impossible since the money supply is endogenous. A tax cut is not a beggar-thy-neighbor policy because it leads to a decrease in the domestic current account balance and an increase in the rest of the world's current account balance, expanding its output and employment.
Monetary policy in one country has a beggar-thy-neighbor element under flexible exchange rates because there is an increase in the domestic current account balance and an identical decline in the rest-of-world current account balance. But the fact that the world money supply increases, albeit by a trivial amount, is a mitigating factor. And if all countries expand their money supplies the world will get to full employment notwithstanding the adverse effect of each country's monetary expansion on the other countries' current account balances. This is because the world monetary expansion will lead to a decline in the world interest rate.