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.