Government Measures to Correct AD
1 Quick Explanation 1–3 min
Excess demand → contractionary (fiscal + monetary) measures.
Deficient demand → expansionary (fiscal + monetary) measures.
2 Detailed Notes
Key points
Correcting excess demand (inflation)
- Fiscal: raise taxes (direct), cut government expenditure, reduce public borrowing.
- Monetary: raise repo/bank rate, raise CRR/SLR, sell securities (OMO), reduce money supply.
Key points
Correcting deficient demand (recession)
- Fiscal: cut taxes, increase government expenditure, increase public welfare spending.
- Monetary: cut repo/bank rate, lower CRR/SLR, buy securities (OMO), increase money supply.
Comparison
Monetary vs fiscal approach
| Situation | Monetary policy | Fiscal policy |
|---|---|---|
| Excess demand | Higher rates, higher CRR, sell G-secs | Higher taxes, lower govt spending |
| Deficient demand | Lower rates, lower CRR, buy G-secs | Lower taxes, higher govt spending |
Important
Exam tip
Classify every measure as 'monetary (RBI)' or 'fiscal (government)' first, then say whether it raises or lowers AD. Never mix up the tools.
In One Minute
Excess demand: contractionary policy (taxes up, spending down, rates up). Deficient demand: expansionary policy (taxes down, spending up, rates down).
Important for Exam
- ⭐ 6-marks: 'measures to correct excess/deficient demand'.
- ⭐ Classify tools as monetary or fiscal.
- ⭐ Effect of each measure on AD.
- ⭐ Expansionary vs contractionary policy.
Watch & Learn
Watch on YouTubeGovernment Budget - Part 1 - Easiest Explanation - Chapter 10 - Class 12 - Macro Economics
by Rajat Arora
Why watch? All fiscal & monetary measures with diagrams.
Open on YouTube Watch on YouTubeGovernment Budget - Part 1 - Easiest Explanation - Chapter 10 - Class 12 - Macro Economics
by Rajat Arora
Why watch? Clear classification of all tools.
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