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.
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