Determination of Income and Employment

Quickly browse through questions and notes on related topics. You can also download and read this topic offline.

• Questions
• Summary

Excess Demand: Excess demand refers to a situation when aggregate demand exceeds aggregate supply corresponding to full employment. Excess Demand causes Inflationary Gap i.e. When aggregate demand is more than 'level of output at full employment', then the excess or gap is called inflationary gap.

Diagrammatic Presentation:

Important Measures to Control Situation of Excess Demand:

1. Fiscal Policy: Fiscal policy is the expenditure and revenue (tax) policy of the government to accomplish the desired objectives. Tools of fiscal policy are:
   (i) Expenditure Policy (ii) Revenue Policy  (iii) Public Borrowing (iv) Deficit Financing
2. Monetary Policy: It is the policy of the central bank of a country to control money supply and credit in the economy. Measures of Monetary Policy:
   Quantitative Measures:
   (i) Bank Rate (ii) Open Market Operations (iii) Cash-Reserve Ratio (iv) Statutory Liquidity Ratio (SLR).
   Qualitative Measures:
    (i) Moral Suasion (ii) Margin Requirements (iii) Credit Rationing (iv) Control of consumer credit and direct action.