eaplain deflationary gap?also explain the role of margin requirement reducing it?

The answer to the concerned question is extensively covered in our study material. You can find it in the below mentioned link.

(for the concept of Deflationary Gap)


(and for the concept of measures to curb deflationary gap- Marginal Requirements)


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 When aggregate supply is more than aggregate demand at full level of employment, it is called the situation of deficient demand.

1) Increasing public expenditure -The government can step up public works, like roads, and dam construction, bridges, railway lines, etc so as to provide more employment which will allow money flow to the general public.

(2) Reducing tax on income so that people have more purchasing power.

(3) Encouraging deficit financing i.e, printing of more notes resulting in increased money supply

(4) Reducing bank rates and cash-reserve ratio so that credit is cheaply and easily available. Another result of this is that banks will be encouraged to give credit since they will have more money at their disposal.

(5)Open market operations-By purchasing government securities from banks, the central bank can  increase the total money with the banks, thereby making it easier for them to disburse credit.

(6) Reducing margin requirement-Through this borrowing will be encouraged and entrepreneurs will be able to get more credit against their security because have to keep less reserves with them.

(7) Foreign trade policy-The government should refocus its export policy which should encourage exports while discouraging imports as increasing exports will generate growing employment and incom

  • 0

 Deflationary gap refers to the gap by which the actual AD falls short of AD required at full employment equilibrium.

To correct the deflationary gap, central bank reduces marginal requirement of loan. This encourages borrowing by businessmen who can now get more credit against their security. As a result, AD rises and thus the deflationary gap is reduced.

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