ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Excess demand is a situation where quantity demanded is more than quantity supplied. The government will take measures to reduce the money supply in the market through monetary policies like increase in bank rate, sale of government securities, increase in cash reserve ratio.

Detailed explanation-2: -In a situation of excess demand leading to inflation, Central Bank raises bank rate. This raises cost of borrowing which discourages commercial banks in borrowing from Central Bank. Increase in bank rate forces the commercial banks to increase their lending rate of interest to consumers and investors.

Detailed explanation-3: -To correct the deficient demand, the central bank decreases CRR or/and SLR. It increases the amount of effective cash resources of commercial banks and enhances their credit creating power. It will raise the level of borrowings and helps to minimise the deficiency in demand.

Detailed explanation-4: -Monetary policy is commonly classified as either expansionary or contractionary. The Federal Reserve commonly uses three strategies for monetary policy including reserve requirements, the discount rate, and open market operations.

Detailed explanation-5: -Excess demand and deficient demand can be corrected through government fiscal policy (i.e., government expenditure, taxes) and Central Bank’s monetary policy measures (like Bank rate, Open market operations, Cash reserve ratio, etc.).