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HOW TO SOLVE THE PROBLEM OF DEFICIENT DEMAND?

 Deficient demand is basically a situation which arises when the aggregate demand is less than the aggregate supply that too when the economy is at full employment level. This means that the population is demanding less that the country is ready to produce with all the resources available. This could happen due to many reasons like increment in taxes, increase in the imports, decrease in the exports, decrease in government expenditure and many more. Due to these reasons, the population holds no money power to demand and therefore, the aggregate demand decreases. During these times, the aim to circulating more and more money among the population so that their demanding power could increase. So, how does the government control such a consequential matter. Here are the measures taken by the government.

 

FISCAL POLICY

 

1.INCREASE IN GOVERNMENT SPENDING

The government usually spends a huge amount of money in the infrastructure and the administrative operations. During the time of deficient demand, they would increase these spendings because then they would have to pay more to their workers, a part of the population, and eventually more money would be circulated in the economy.

 

2.DECREASE IN TAXES

When in deficient demand, the government reduces the rate of taxes so that the public will have more money with them to spend on consumption and investment and eventually they will end up demanding more.

 

MONETARY POLICY

 

1.DECREASE IN BANK RATE

Bank rate is basically the rate at which the central bank lends money to the commercial bank to meet their long-term needs.  During this time, the central bank decreases these rate so that the commercial banks have more than enough funds available with them to lend to the public and eventually, more money would be circulated in the economy.

 

2.DECREASE IN REPO RATE

Repo rate is the rate at which the central bank lends money to the commercial bank to meet their short-term needs. This also works as the same way, the banks will have enough funds to circulate to the public and the demand would surely increase.

 

3.PURCHASE OF SECURITIES

In the time of deficient demand, the central bank starts purchasing securities from the commercial bank. While selling these securities, the commercial banks will get more money as their payment in their reserves which will again increase their lending power and the public will be able to borrow more.

 

4.DECREASE IN LEGAL RESERVE RATIO (LRR)

The commercial banks are supposed to be maintaining a legal reserve. There are two types of these reserves, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SRR). If these reserves would be decreased then eventually the banks will have more money to lend forward to the people and hence, more money circulation in the economy.

 

5.DECREASE IN MARGIN REQUIREMENT

Margin requirement is the difference between the market value of the security offered and the value lent to them. During deficient demand, the RBI decreases this margin which allows the banks to lend extra to the public. Also, after a decrease in this margin, the public is more interested in borrowing money.

 

6.ADVISE TO ENCOURAGE LENDING

During the deficient demand, the central bank advises, requests or persuades the commercial banks to lend more money ahead to the public. This helps to increase the money power among the population and eventually the aggregate demand raises.