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Deficit Demand can be controlled/corrected by using
Fiscal Policy
or
Monetary Policy
Fiscal Policy
These policies are framed by Central Govt
In this case, govt decides on following
Increase in Govt Spending
(The govt spends more so ,demand for product increases)
Reduces Taxes
(Disposable income of people increases and they are able to spend more)
Monetary Policy
These policies are framed by Central Bank (RBI)
Through these policy, RBI increases amt of credit in circulation
More the credit, more the amt of money in market so more will be the demand
In this case, RBI does the following
RBI decreases Bank Rate and Repo Rate
Repo rate is the rate at which the RBI lends to commercial banks by purchasing securities
while bank rate is the lending rate at which commercial banks can borrow from the RBI without providing any security.
When RBI decreases Bank Rate and Repo Rate
Now banks have to pay less int on loan, so they will charge less from customers
So people will take more loan (more credit)
More the credit, more the amt of money in market so more will be the demand
RBI decreases Cash Reserve Ratio/Statutory liquidity ratio
This leads to more amt available with banks to give loans
More the credit, more the amt of money in market so more will be the demand
RBI does Open Market Operations
During excess demand, RBI purchase its securities in market
Public subscribe to these securities
Hence more amt is available to them to spend
More the amt of money in market so more will be the demand
Decrease in Margin Requirement for Loan
As we know, banks gives loan only if we provide some security like offer some property for mortgage
Suppose Property Value is 100 lacs, bank will not give loan of 100 lacs
Suppose Margin as per Bank rule is 25%,it means Bank will give maximum 75 Lacs loan
Now if RBI decreases these margin requirement to 20%
So now if Property value is 100 lacs, Margin as per bank rule is 20%,it means maximum 80 Lacs loan is allowed
More the amt of money in market so more will be the demand
Moral Suasion/Withdraw Credit Rationing
RBI advices banks to grant loans for certain sectors
More the amt of money in market so more will be the demand
