Q. 174.3( 9 Votes )

‘An economy is op

Answer :

It refers to the state of equilibrium where level of demand is less than full employment level of output’ i.e aggregate demand is equal to aggregate supply but resources are still not fully employed. In other words, it is a situation where resources are not fully utilized or underemployed and there is excess capacity in the economy. When level of demand is less than full employment level of output, it is called deficient demand which pushes the economy into under-employment equilibrium. It results in deflationary gap, i.e., gap between aggregate demand and ‘aggregate supply at full employment’

Fiscal measure to tackle this situation is:

Decrease in Taxes: To correct underemployment or deficient demand in an economy tax burden on the household and producer sector is reduced. When the government reduces the taxes, the purchasing power increases in the economy hence aggregate demand increases. Hence, AD becomes equal to AS

Monetary measure to tackle this situation is:

Reduction in Cash reserve ratio (CRR): CRR is reduced in case of deficient demand. A cut in CRR increases credit creation capacity of the commercial banks as it releases more liquidity into the system. Availability of credit increases, hence AD tends to increase.

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