Question

Explain the meaning of under-employment equilibrium. Explain two measures by which full employment equilibrium can be reached.

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.

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

2) Margin requirement refers to the difference between the current value of security offered for loan and the value of loan granted. During deficient demand or deflation, the central bank decreases the margin in order to increase the credit creation capacity of the commercial bank and as a result, the money supply in an economy gets increased and the deficient demand or deflationary gap is combated.