Question

Explain the concept of 'deficient demand' in macroeconomics. Also explain the role of Bank Rate in correcting it.

Answer 1

Deficient demand refers to the situation when aggregate demand is short of aggregate supply corresponding. Aggregate supply being perfectly elastic, it converges with aggregate demand at a lower level of output lower than the full employment level of output in the economy. This is a situation of underemployment equilibrium.

During deflation, the bank rate is decreased. As a follow-up action, the commercial banks lower the market rate of interest. This increases the demand for credit and thus deficient demand or deflation can be combated.