Reasons for Deficit Demand

Decrease of Propensity to Consume (Dec in MPC)

It means consumers start spending less percentage of income

Example

Suppose a person was earning 10000 and earlier spending 7000

Now he is earning same 10000 but he is spending 6000

This less spending leads to lower consumption expenditure and hence less demand

Increase in Taxes

If Tax Rates increase, disposable income decreases, hence person spends less

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 12000

So now his disposable income became 50000 - 12000=38000

Since, his disposable income decreases by 2000 (40000-38000), he still spend more

This lower spending leads to lower consumption expenditure and hence less demand

Decrease in Govt Spending

Govt may decrease public expenditure in budget

Hence, govt will be spending less in purchasing goods and service

This lower spending leads to lower consumption expenditure and hence less demand

Change in interest Rates

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

If Int rates on investment decreases, it will lead to less int income

This lower income will lead to less spending

Rise in Import

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

Income of economy will fall

This lower income will lead to less spending

This lower spending leads to lower consumption expenditure and hence less demand

This lower spending leads to lower consumption expenditure and hence less demand

Decrease in Exports

If we export less, it will lead to lower income for the economy

This lower income will lead to less spending

This lower spending leads to lower consumption expenditure and hence less demand

NCERT Questions

No questions in this part

Other Books

Question 1

How does change in Import cause deficit demand?