Excess
demand is basically a situation which arises when the aggregate demand is more
than the aggregate supply that too when the economy is at full employment
level. This means that the population is demanding more that the country can
produce with all the resources available. This could happen due to many reasons
like reduction in taxes, decrease in the imports, increase in the exports,
increase in government expenditure and many more. Due to these reasons, the
population holds more money power and therefore, demand more to raise their
standard of living. During these times, the aim is to extract as much money
from the population as possible so that their demanding power would decrease. So,
how does the government control such a consequential matter. Here are the
measures taken by the government.
FISCAL
POLICY
1.DECREASE
IN GOVERNEMNT SPENDINGS
Generally,
the government spends a huge amount on the infrastructure and administrative
activities. Although, during such a situation, they decrease these spendings so
that they will have to pay less to the workers who are a part of the population
and eventually it will lessen their money power. The government should usually
reduce the expenditure on defence as they rarely contribute towards the growth
of the economy.
2.INCREASE
IN TAXES
Here, the
government increases the rate of taxes and also tries to impose some new taxes.
This is because they want to take away the extra money circulating in the
economy so that their credit availability would be lowered, and they won’t be
able to demand more than their need.
MONETARY
POLICY
1.INCREASE
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 increases these rate so that the commercial banks
wont have enough funds available with them to lend to the public and
eventually, less money would be circulated in the economy.
2.INCREASE
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 won’t have
enough funds to circulate to the public and the demand would decrease.
3.SALE OF
SECURITIES
In the time
of excess demand, the central bank offers securities to the commercial bank. In
order to purchase these securities, the commercial banks will have to use their
own money from their reserves which again will reduce their lending power and
the public won’t be able to borrow much.
4.INCREASE
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 increased then eventually the banks will have
less money to lend forward to the people and hence, less money circulation in
the economy.
5.INCREASE
IN MARGIN REQUIREMENT
Margin
requirement is the difference between the market value of the security offered
and the value lent to them. During excess demand, the RBI increases this margin
which does not allow the banks to lend extra to the public. Also, after an
increase in this margin, the public is less interested in borrowing money.
6.ADVISE TO
DISCOURAGE LENDING
During the
excess demand, the central bank advises, requests or persuades the commercial
banks not to lend money ahead for a speculative or any non-essential activity.
This helps to reduce the money power among the population and eventually decrease
the aggregate demand.
0 Comments