ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The policy adopted by the Central Bank by regulating the cost of credit (i.e. rate of interest) and availability of credit (i.e. money supply) in the economy to control the problem of deficient and excess demand is termed as monetary policy.

Detailed explanation-2: -To correct the situation of deficient demand, the Central Bank will reduce the repo rate. This leads to a reduction in lending rates by the banks. Availability of cheaper credit increases the money supply and motivates the firms to borrow more for investment.

Detailed explanation-3: -Fiscal policy refers to the budgetary policy of the government, which involves the government controlling its level of spending and tax rates within the economy. The government uses these two tools to influence the economy. It is the sister strategy to monetary policy.

Detailed explanation-4: -The situation when aggregate demand is more than the aggregate supply corresponding to full employment level of output in the economy is called excess demand. The situation when aggregate demand is less than aggregate supply corresponding to the full employment level of output in the economy is called deficient demand.

Detailed explanation-5: -Government expenditure: A cut in expenditure acts like a withdrawal from the circular flow of income of the economy. Taxes: Government increases taxes in order to correct a situation of inflationary gap or excess demand. More items