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Class 12 Macro Economics Notes · CBSE

Policy Measures to Correct Deficient Demand

9.5 Policy Measures to Correct Deficient Demand — expansionary fiscal and monetary tools to increase aggregate demand. CBSE Class 12 Macroeconomics notes with policy flow diagrams.

Last updated: 22 Aug 2026

Notes

Fiscal Policy Measures to Correct Deficient Demand

During deficient demand, the government uses expansionary fiscal policy — increasing spending and decreasing taxes — to boost aggregate demand.

Monetary Policy Measures to Correct Deficient Demand

During deficient demand, the RBI follows a Cheap Money Policy to increase the flow of credit in the economy and boost aggregate demand.

1.

Decrease in Bank Rate - Reduces the market rate of interest, induces people to borrow more, increases aggregate demand. Cheaper credit encourages businesses to invest and consumers to spend.

2.

Decrease in Repo Rate - Reduces interest rates across the economy, induces borrowing for homes, cars, and business expansion, increasing aggregate demand.

3.

Decrease in Reverse Repo Rate - Discourages banks from depositing funds with the Central Bank, raises their credit-creating power, increases consumption and investment expenditure.

4.

Open Market Operations (Purchase of Securities) - Central bank purchases securities, increases reserves of commercial banks, enhances credit-creating power, increases money supply and aggregate demand.

5.

Decrease in Legal Reserve Requirements - Lower CRR and SLR increase effective cash resources of banks, enhance credit-creating power, and increase money supply in the economy.

Cheap Money Policy: The opposite of Tight Money Policy. All instruments are used in the reverse direction to encourage borrowing, increase credit flow, and raise aggregate demand.

Key Takeaways

Key Takeaways

  • To correct deficient demand, the government uses expansionary fiscal policy - increase spending, decrease taxes.
  • The RBI uses a Cheap Money Policy - decrease Bank Rate, Repo Rate, CRR, SLR, and purchase securities.
  • Public borrowings are reduced and deficit financing is increased to pump more money into the economy.
  • Both fiscal and monetary expansion work together to raise aggregate demand back to full employment level.
  • During COVID-19, India used exactly these measures - increased government spending (free food grains, cash transfers) and RBI cut repo rate to historic low of 4%.