Role of monetary policy as a measure to correct excess demand and deficiet demand
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During the situation of deficient demand, the level of aggregate demand in the economy is less than the full employment level of output.
ADVERTISEMENTS:
It happens due to decrease in money supply and availability of credit. The measures adopted to control deficient demand are just the opposite of the measures used in excess demand.
Following measures may be adopted to correct the deficient demand:
Increase in Government Spending:
It is a part of Fiscal Policy. Government incurs expenditure on infrastructural and administrative activities. During deficient demand, the government should increase expenditure on public works like construction of roads, flyovers, buildings, etc. with a view to provide additional income to people. This will increase the aggregate demand and will help to correct the situation of deficient demand.
Increase in Availability of Credit:
During deflationary situations, the central bank aims to ensure easy availability of credit and reducing cost of borrowing money through its ‘Monetary Policy’.
ADVERTISEMENTS:
It happens due to decrease in money supply and availability of credit. The measures adopted to control deficient demand are just the opposite of the measures used in excess demand.
Following measures may be adopted to correct the deficient demand:
Increase in Government Spending:
It is a part of Fiscal Policy. Government incurs expenditure on infrastructural and administrative activities. During deficient demand, the government should increase expenditure on public works like construction of roads, flyovers, buildings, etc. with a view to provide additional income to people. This will increase the aggregate demand and will help to correct the situation of deficient demand.
Increase in Availability of Credit:
During deflationary situations, the central bank aims to ensure easy availability of credit and reducing cost of borrowing money through its ‘Monetary Policy’.
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