Reasons for Excess Demand

Increase of Propensity to Consume (Inc in MPC)

It means consumers start spending more percentage of income

Example

Suppose a person was earning 10000 and earlier spending 7000

Now he is earning same 10000 but he is spending 8000

This extra spending leads to higher consumption expenditure and hence more demand

Reduction in Taxes

If Tax Rates decrease, disposable income increases, hence person spends more

Example

Suppose a person was earning 50000 and paying tax 10000,his net take home salary (or disposable income) was 500000-10000=40000

Suppose govt reduced taxes to Rs 4000

So now his disposable income became 50000 - 4000 = 46000

Since, his disposable income exceeds by 6000 (46000-40000), he still spend more

This extra spending leads to higher consumption expenditure and hence more demand

Increase in Govt Spending

Govt may increase public expenditure in budget

Hence, govt will be spending more and purchasing goods and service

This extra spending leads to higher consumption expenditure and hence more demand

Change in interest Rates

If interest rates on borrowings reduce, it will lead to less interest expense and more income

If Int rates on investment increases, it will lead to more int income

This additional income will lead to more spending

This extra spending leads to higher consumption expenditure and hence more demand

Fall in Import

If we import less goods and services and purchase more from within country

Income of economy will rise

This additional income will lead to more spending

This extra spending leads to higher consumption expenditure and hence more demand

Increase in Exports

If we export more, it will lead to additional income for the economy

This additional income will lead to more spending

This extra spending leads to higher consumption expenditure and hence more demand

Deficit Financing

It is a situation when govt spends more than it earns

In this case, govt fills the gap by printing new currency or borrowing

In this case, govt spends more and excess currency enters the market

This extra spending leads to higher consumption expenditure and hence more demand

NCERT Questions

No questions in this part

Other Books

Question 1

How does excess demand occur because of change in tax rate?