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Determination of Income and Employment — Economics STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceEconomicsDetermination of Income and Employment3 Marks
Question
Explain briefly how changes in:
  1. Government expenditure,
  2. Bank rate, can be helpful in correcting excess demand in an economy.
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Answer

  1. Reduction in government expenditure: The government should reduce its expenditure on non-essential and non-development items to correct excess demand in an economy. Transfer payments such as oldage pension, subsidies, etc. should also be reduced. Reduction in government expenditure will help in reducing aggregate demand and thus the problem of excess demand can be solved.
  2. Increase in bank rate: For controlling excess demand, the central bank should increase the bank rate. An increase in bank rate, raises the rate of interest by the commercial banks and as a result credit becomes costly. Accordingly, the demand for credit is reduced and aggregate demand is reduced and the problem of excess demand is corrected.

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