Question:
If an economy is operating below full employment equilibrium, the government should:
If an economy is operating below full employment equilibrium, the government should:
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Deficient Demand \(\Rightarrow\) Expansionary Fiscal Policy.
Updated On: May 25, 2026
- Increase taxes and reduce expenditure
- Reduce money supply
- Increase government expenditure
- Increase repo rate
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The Correct Option is C
Solution and Explanation
Concept:
Below full employment equilibrium indicates deficient demand in the economy.
Step 1: Understanding deficient demand.
Deficient demand causes:
Step 2: Government corrective measures.
To increase aggregate demand, government should:
Step 3: Evaluating options.
(A) Would reduce demand further.
(B) Would contract economy.
(C) Correct expansionary fiscal policy.
(D) Higher repo rate reduces borrowing.
Step 4: Final conclusion.
Therefore: \[ \boxed{\text{(C) Increase government expenditure}} \]
Step 1: Understanding deficient demand.
Deficient demand causes:
- Unemployment
- Lower production
- Idle resources
Step 2: Government corrective measures.
To increase aggregate demand, government should:
- Increase expenditure
- Reduce taxes
- Encourage investment
Step 3: Evaluating options.
(A) Would reduce demand further.
(B) Would contract economy.
(C) Correct expansionary fiscal policy.
(D) Higher repo rate reduces borrowing.
Step 4: Final conclusion.
Therefore: \[ \boxed{\text{(C) Increase government expenditure}} \]
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