Question

State two fiscal measures to correct deficient demand in an economy.

Discuss the fiscal policy measures to solve the situation of deficient demand in an economy.

Explain one fiscal measure to correct deficient demand.

What possible fiscal policy measures can be taken with respect to expenditure and income to correct Deficit demand?

Discuss the fiscal measures to solve the situation of deficient demand.

Answer 1

1. Taxation: The government should lower direct taxes on personal income and corporate profits. A reduction in personal income taxes, such as income tax, increases personal disposable income and thereby consumption expenditure. Tax cuts on business profits will improve the motivation to invest. A reduction in indirect taxes, such as excise duties and GST, will encourage households to raise aggregate consumption expenditure. This will improve corporate prospects and so increase investment spending.
2. Public Expenditure: The most significant and straightforward strategy to address weak demand is to increase public spending. The government, in particular, should make significant investments in public works such as roads, bridges, and railways. This will have a direct positive impact on aggregate demand. Furthermore, the government should implement a range of welfare programs, including unemployment benefits and old-age pensions, to stimulate aggregate demand. To stimulate investment expenditure, the government should also give producers production subsidies and other forms of incentives.
3. Public Borrowing: Public borrowing should be discouraged. This will result in higher income and purchasing power for the population, who will be enticed to raise aggregate consumption spending.
4. Deficit Financing: The government should follow a policy of deficit financing. This will boost the government’s ability to spend. As a result, aggregate demand will rise.