Question

How can excess demand and deficient demand be tackled?

Give two measures each to correct excess demand and deficient demand.

Answer 1

Excess demand and deficient demand can be managed using suitable fiscal and monetary policies.

To control excess demand, the government may adopt fiscal measures such as reducing its expenditure and increasing taxes. Simultaneously, the central bank can implement a contractionary monetary policy by raising the bank rate and increasing the reserve ratio, among other steps.

In contrast, to deal with deficient demand, the government can boost overall demand by raising public expenditure, cutting taxes, or doing both. Additionally, the central bank can apply an expansionary monetary policy by lowering the bank rate and reducing the reserve ratio, helping stimulate demand in the economy.