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    Eco Notes

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    Vaibhav
    1. Excess demand occurs when aggregate demand exceeds aggregate supply at full employment, resulting in inflationary pressures. Deficient demand occurs when aggregate demand is below aggregate supply at full employment, resulting in deflationary pressures and involuntary unemployment. 2. Causes of excess demand include increases in consumption, reductions in taxes, and rises in investment, exports, and government spending. Causes of deficient demand include decreases in the above factors. 3. With excess demand, output is at full capacity so prices rise, while with deficient demand, output falls, causing unemployment and declining prices. Fiscal and monetary policies aim to reduce excess demand or stimulate deficient demand to achieve equilibrium.

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    Eco Notes

    Uploaded by

    Vaibhav
    21 views2 pages
    1. Excess demand occurs when aggregate demand exceeds aggregate supply at full employment, resulting in inflationary pressures. Deficient demand occurs when aggregate demand is below aggregate supply at full employment, resulting in deflationary pressures and involuntary unemployment. 2. Causes of excess demand include increases in consumption, reductions in taxes, and rises in investment, exports, and government spending. Causes of deficient demand include decreases in the above factors. 3. With excess demand, output is at full capacity so prices rise, while with deficient demand, output falls, causing unemployment and declining prices. Fiscal and monetary policies aim to reduce excess demand or stimulate deficient demand to achieve equilibrium.

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    eco notes (32)

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    1. Excess demand occurs when aggregate demand exceeds aggregate supply at full employment, resulting in inflationary pressures. Deficient demand occurs when aggregate demand is below aggregate supply at full employment, resulting in deflationary pressures and involuntary unemployment. 2. Causes of excess demand include increases in consumption, reductions in taxes, and rises in investment, exports, and government spending. Causes of deficient demand include decreases in the above factors. 3. With excess demand, output is at full capacity so prices rise, while with deficient demand, output falls, causing unemployment and declining prices. Fiscal and monetary policies aim to reduce excess demand or stimulate deficient demand to achieve equilibrium.

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    © All Rights Reserved
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    21 views2 pages

    Eco Notes

    Uploaded by

    Vaibhav
    1. Excess demand occurs when aggregate demand exceeds aggregate supply at full employment, resulting in inflationary pressures. Deficient demand occurs when aggregate demand is below aggregate supply at full employment, resulting in deflationary pressures and involuntary unemployment. 2. Causes of excess demand include increases in consumption, reductions in taxes, and rises in investment, exports, and government spending. Causes of deficient demand include decreases in the above factors. 3. With excess demand, output is at full capacity so prices rise, while with deficient demand, output falls, causing unemployment and declining prices. Fiscal and monetary policies aim to reduce excess demand or stimulate deficient demand to achieve equilibrium.

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    of 2

    -- - - - - - - - - -- -- - - - -- - -- - -

    Excess Demand and Deficient Demand

    1. Excess Demand and Deficient Demand:-

    Excess Demand -The situation when Deficient Demand -The situation when
    aggregate demand is more than aggregate demand is less than aggregate
    aggregate supply.corresponding to full supply corresponding to full employment
    employment level of output in the level of output in the economy.
    economy.
    Inflationary Gap -The gap by which Oeiflationary Gap -The gap by which actual
    actual aggregate demand . :_':. <. ... aggregate demand' .. -::.. . .
    · · ex~eedsthe ,_: .- .:. , -' fall short of aggregate demand
    aggregate demand required-to required to establish full employment
    establish full emp·loyment equilibrium. equilibrium.
    Diagram - Diagram-
    ~ '{ lP.S)
    ¢

    ~ (\O.P, I
    P,. -1". 1 Jll.\io-nru'J U AO =C+'f+Ot
    j.'T\,- F -- -- --
    .! -\- - AP-;: C...\ :t
    E (f~I\ E:.""'p \~ rr, cnt)

    Reasons:- Reasons:-
    a) Rise in Propensity to Consume -It · a) Fall in Propensity to Consume -It arises
    arises because of increase in because of decrease in·consumption
    consumption expenditure due to rise in expenditure due to fall in propensity to
    propensity to consume. consume.
    b) Reduction in Taxes -It may occur b) Increase in Taxes -It may occur due to
    due to increase in disposable income decrease in disposable income and
    and consumption demand. consump_ t ion demand.
    c) Increase in Government c) Decrease in Government expenditure-
    expenditure- Rise in government Fall in government qer:nand for goods arid
    demand for goods and services due to services du2 to decrease in public
    increase in public expenditure. expenditure.
    d) Increase in Investment-It is due to .d) Decrease in Investment -It is due to
    decrease in rate of interest or increase increase in rate of interest or decrease in
    in expected. returns. expected returns.
    e) Fall in Import -It is due to higher e) Rise in Import-It 1s due to lesser
    international price in comparison to international price in comparison to
    domestic price. . domestic price.
    f) Rise in Export -It is due to f) Fali in Export-It is due to comparatively
    comparatively lower prices of domestic higher prices of domestic goods or due to
    goous or due to decrease in the increase in the exchange rate of dumestic
    exchange rate of domestic currency. currency.
    I

    ri;;pact:- - - - -- -- - --- - -- -- - - - - - - -- ·- - - - - -1
    I

    ·
    lmpact:- 1
    1 a) Effect on Output -It does not affect
    a) Effect on Output -
    : the level of ?utput because economy is Due to lack of sufficient aggregate
    demand,
    already at full employme nt level and . there will be an increase in the inventory
    there is no idle cap~city in the stock .It will force the firms_ to plan for lesser
    economy. production for the subsequent period. As a
    result planned output will fall.
    b) Effect on Employme nt- It does not b) Effect on Employme nt- It causes
    affect the employme nt because fTuvoluntary unemploym ent/in the economy
    economy is already at full employmen t due to fall in the planned output.
    level and there is no involunta_ry
    unemployment.
    c) Effect on General Price Level -It c) Effect on General Price Level -It leads to
    leads to rise in general price level as fall in general price level as aggregate
    aggregate demand is more than demand is less than aggregate supply.
    aggregate supply.
    Fiscal Measure:- Fiscal Measure:-
    a) Government Spending- Governme nt a) Government Spending-Government will
    will decrease the spending to maximum increase the spending to maximum possible
    possible extent on defense and extent on public works with a view to
    unproductive works. provide additional income to people.
    b) Tax Rate -Governm ent will increase b) Tax Rate -Governm ent will decrease the
    the tax rate that will reduce the tax rate that will increase the purchasing
    purchasing power and hence the power and hence the aggregate demand.
    aggregate demand. ,
    Monetary Measures :- Monetary Measures :-
    a) Bank Rate/Repo Rate -Increase the a) Banlc Rate/Repo Rate -Decrease the
    bank rate/repo rate, which discourages bank rate/repo rate, which encourages
    borrowers from taking loan. It reduces borrowers from taking loan. It increases the
    the availability of credit in the availability of credit in the economy.
    economy.
    b) CRR/SLR -Increase the CRR/SLR b) CRR/SLR-Decrease the CRR/SLR which
    which reduces the amount of effective increases the amount of effective cash
    cash resources of commercial bank and resources of commercia l bank and enhances
    limits their credit creating power. their credit creating power.
    c) Margin Requireme nt-Increas e the c) Margin Requireme nt -Decrease the
    rnargin requir:ement which restricts the margin requiremen t V1hich enhances the
    credit creating power of the bank. credit creating power of the bank.
    d) Open Market Operation -Central d) Open Market Operation -Central bank
    bank offers security for sale which offers to buy security which increases the
    reduces the reserves of the commercial reserves of the commercia l bank and its
    bank and its ability to create credit. ability to create credit.

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