Question

Explain the situation of deficient demand in an economy. Also explain the role of Repo Rate in correcting this.

Answer 1

Deficient demand refers to the situation when aggregate demand is short of aggregate supply corresponding.

Role of repo rate: Repo rate relates to the loans offered by the RBI to the commercial banks not without collateral. During deficient demand or deflation repo rate is decreased. As a follow-up action, the commercial banks decrease the market rate of interest. This increses the demand for credit and thus deficient demand or deflation can be combated.