In the situation of inflation there is a high
price rise in the economy, this is due to increase in Aggregate Demand (AD). When there is an increase in AD beyond the full
employment level, output remain constant since output cannot be increased as
there is full employment, all resources are fully utilized, this leads to an
increase the cost of production of existing factors of production and price
rises. More and more rise in prices leads to a situation of inflation
due to the situation of excess demand .
Fiscal Policy
Fiscal policy is the revenue and expenditure
policy of the government. It is also called as the budgetary policy of the
government. Through its revenue and expenditure policy, situation of ---
is checked and controlled by varying the size
and composition
of revenue as well as of expenditure. Fiscal policy leads to the growth and
stability of the economy. Fiscal
policy is the policy of the government which includes components like taxation,
public expenditure and public borrowing. Following
are the principal instruments of fiscal policy which, when used in a proper
combination to achieve the best possible results in terms of the desired
economic objectives like.
Maintaining economic stability
High employment
And,
accelerating economic growth
How Monetary Policy Correct deficient demand situation
After
going through Fiscal Policy to control the situation of deficient demand, we
will know see how monetary policy of the government can be used to solve the
situation of decreased aggregate demand.
Monetary Policy:
Monetary policy can be used effectively to control
the situation of deficient demand Monetary policy is the policy of the central
bank to achieve various policy of economic policy which includes components
like bank rate, open market operations, cash reserve and statutory liquidity
ratio to correct deficient demand.Following
are the principal components of Monetary policy. Along with each component, we
are describing the way it is used to correct situations of deficient demand.
How Fiscal Policy Correct deficient demand situation
We have seen that deficient demand leads to
deflation in the economy,
so it’s necessary
to correct this deficient demand situation. Here,
we will see how Fiscal Policy of the government will control the situation of
deficient demand.
Fiscal Policy:
Fiscal policy can be used effectively to raise
demand in the economy to correct the situation of deficient demand. Fiscal policy is the policy of the government
which includes components like taxation, public expenditure and public
borrowing.
Following
are the principal components of fiscal policy. Along with each component, we
are describing the way it is used to correct situations of deficient demand.
a) Government
expenditure:
It
is the principal instrument of fiscal policy. The government of a country
incurs various types of expenditure, mainly:
i)
Expenditure on public work programmes like construction of dams, bridges, roads
etc.
ii)
Expenditure on education and welfare programmes.
iii)
Expenditure on defence and law and order.
iv)
Expenditure on subsidies to the producer for encouraging production.
In
the situation of deficient demand, the government should increase its
expenditure (as said above).
Increasing government expenditure means
increasing government spending. We have read in investment multiplier mechanism
that expenditure leads income generation.
Expenditure by one person becomes the
income of another person.
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