Read the following text carefully : In an economy, a significant reduction in Aggregate demand raised concerns about future growth prospects of the country. This economic downturn underscores the urgent need for strategic measures to boost confidence of households and stimulate economic activities. Based on the above text and common understanding, explain the measures which the government may take to stabilise the indicated situation.

Question

Accepted Answer

**Analysis of reduction in Aggregate Demand:**

A significant reduction in AD leads to:
- **Fall in output and income:** Reduced demand causes firms to cut production
- **Rise in unemployment:** Lower production means fewer workers needed
- **Unplanned inventory accumulation:** Unsold goods pile up with firms

**Measures to correct:**

**Fiscal Policy:**
- Increase government spending
- Reduce taxes to boost consumption
- Increase transfer payments

**Monetary Policy:**
- Reduce interest rates
- Increase money supply through open market operations
- Reduce CRR to increase lending capacity of banks

These expansionary measures will boost aggregate demand, restore full employment and promote economic growth.