Measures to Correct Deficient and Excess Demand

Economists and policy makers have been advocating the role of government and the monetary authorities to intervene in order to bring economic stabilization. Measures to correct the situation of excess demand include the monetary policy of the central bank and the fiscal policy of the government. Fiscal policy refers to budgetary policy of the government relating to public expenditure, taxation and management of public debt. Monetary policy is a policy by which the monetary authority (central bank) of the country controls the supply of money and availability of credit and rate of interest in the economy to achieve economic stability. Instrument of Monetary policy are broadly classified into 2 heads: Quantitative Instruments (Quantitative Credit Control) and Qualitative Instruments (Selective Credit Control). Quantitative instrument of monetary policy include Bank Rate, Open Market Operations, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). The qualitative instruments include margin requirements of loan, credit rationing, direct action of central bank and moral suasion. Fiscal policy measures to correct excess demand are: increase in taxes, reduction in government expenditure, etc. Monetary policy measures to correct excess demand situation are increase in CRR, increase in bank rate, etc. Fiscal policy measure to correct deficient demand situation are: reduction in tax rates, increase in public expenditure, etc. Monetary policy measures to correct deficient demand situation are reduction in bank rates, fall in CRR, etc.

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  • Q1

    What do you mean by statutory liquidity ratio?

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    Answer:

    Statutory Liquidity Ratio (SLR) refers to the minimum proportion of total deposits to be held by commercial banks in liquid form (cash or gold).

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  • Q2

    Define bank rate.

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    Answer:

    Bank rate is the rate of interest at which central bank lends money to commercial banks. It represents the cost of money in the economy.

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  • Q3

    What is monetary policy?

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    Answer:

    It is a policy by which the government and central bank of a county try to control the supply of money and availability of credit and rate of interest in the economy to achieve economic stability.

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  • Q4

    What is fiscal policy?

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    Answer:

    Under fiscal policy government uses the instruments of public expenditure, taxation and public borrowing to achieve various objectives of economic policy.

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  • Q5

    Define deficient demand.

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    Answer:

    Deficient demand is a situation in which aggregate demand (AD) is short of aggregate supply (AS) corresponding to full employment in the economy.

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