Question

What is deficient demand in an economy? Explain the measures to control it.

Hint:

Deficient demand = AD below full-employment AS (deflationary gap); corrected via expansionary monetary/fiscal policy and export promotion.

Answer 1

Step 1: Define deficient demand:
Deficient demand is a situation where Aggregate Demand (AD) falls short of Aggregate Supply (AS) at the full-employment level of output — i.e. the economy is capable of producing more than what people are actually willing to spend on. The gap between full-employment AS and the actual (lower) AD is called the deflationary gap.

Step 2: Consequences of deficient demand:
Firms find unsold stocks piling up, cut production, lay off workers, and may reduce prices — leading to falling output, rising unemployment, and a general fall in prices (deflation/recession).

Step 3: Monetary policy measures:
The central bank pursues an expansionary (cheap money) policy: cutting the repo rate, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), and buying government securities in the open market — all of which increase the money supply, lower interest rates, and encourage borrowing for investment and consumption, thereby raising AD.

Step 4: Fiscal policy measures:
The government increases its own spending (public expenditure on infrastructure, welfare schemes) and/or cuts taxes to leave more disposable income in people's hands — both directly and indirectly boost aggregate demand, even if it means running a larger fiscal deficit during the downturn.

Step 5: External-sector measures:
Policies that promote exports (which add to AD) and/or discourage non-essential imports (reducing the demand leakage abroad) can also help raise net exports and close the deflationary gap.

Final Answer:
Deficient demand is AD falling short of full-employment AS (a deflationary gap); it is corrected through expansionary monetary policy (lower CRR/repo/SLR, open-market purchases), expansionary fiscal policy (higher spending, lower taxes), and export-promotion measures.