Aggregate demand is the sum total of planned (ex-ante)
expenditure that the people in an economy are willing to
incur on the purchase of goods and services produced in
the economy during an accounting year corresponding to
different income levels.
Components of AD
(Measurement of AD)
Private Final
Consumption
Expenditure (C)
Investment
Expenditure (I)
Government
Expenditure
(G)
Net Exports
(X – M)
Household consumption expenditure refers to the
expenditure on final goods and services by the
individual households.
Consumption function : Tabular presentation
Y (₹)
C (₹)
Autonomous
0
20
Consumption
50
60
100
100
150
140
200
180
1. There is always some minimum level of C, even when Y = 0. This is called
autonomous consumption ( 𝑪) This leads to negative savings or dissavings.
2. Consumption is positively related to income i.e. rise in Y causes a rise in C and
vice versa.
3. The entire increase in Y during a particular period is not converted into C. A part
of it is saved as well. So the rate of increase of C lags behind the rate of increase of
Y. This is called the Psychological Law of consumption.
Y
Y (₹)
0
50
100
150
200
C
180
Consumption (C)
160
C<Y
140
CY(₹)
(₹)
20
0
60
50
100
140
150
180
200
Savings
120
100
B
80
C = Y Break
i.e. S =Even
0 Point
60
40
20
45
0
50
C > Y i.e. Dissavings
100
150
200
Income(Y)/ Output
Y (₹)
0
50
100
150
200
C (₹) S (₹)
-20
20
60
-10
0
100
140
10
180
20
C>Y

Dissavings
C=Y

Break – even point
C<Y

Savings
Savings
40
C
S (₹)
S (₹)
0
-20
20
-20
50
-10
60
-10
100
100
0
0
150
140
10
10
200
180
20
20
S
Break – Even Point
20
Y (₹)
+S
0
-S
-20
50
100
150
200
Income/ output
Q. Draw a straight
line consumption
curve.
Fromfrom
it derive
a saving curve. Explain
Derivation
of saving
curve
consumption
curvethe steps of
derivation.
Consumption
Y
Steps of Derivation
C
B
Y=C
A
45
O
Income/ Output
Saving
S
O
A’
B’
S=0
1. When Y = 0, S = Hence, corresponding to
point A in fig. (i) mark A’ in
fig. (ii)
2. When Y = C, S = 0
Hence corresponding to
point B in fig. (i), mark B’
in fig. (ii)
3. Join A’ B’ to obtain
the saving curve
Income/ Output
Concepts of
Consumption
Average
Propensity to
Consume (APC)
APC =
C
Y
Marginal
Propensity to
Consume (MPC)
MPC =
C
Y
Concepts of Saving
Average
Propensity to
Save (APS)
Marginal
Propensity to
Save (MPS)
APS =
MPS = S
Y
S
Y
Important concepts related to MPC, MPS, APC and APS
1. APC + APS = 1
CAPC
+ + SAPS== 1Y
Y
Y
Y
2. MPC + MPS = 1
3. The value of MPC, MPS and APC can never be zero.
APC== ∆SCS
MPC
MPS
APS
C
Y
∆Y
Y
Since S
consumption
saving
C
is
and
negative
Yand
cannot
income
whenever
and
beincome
negative,
are positively
C >are
Y,APC
Hence
positively
cannot
related,
APSrelated,
be
they
can
negative.
be
also
they
negative.
change
changeininthe
thesame
samedirection.
direction.
4. The value of MPC and MPS always lie between 0 and 1.
5. The value of APC can be greater than one.
Consumption function expresses functional relationship
between aggregate consumption (C) and national income
(Y).
Thus, consumption (C) is a function of income (Y).
Algebraically,
𝐂 = 𝐂 + 𝐛𝐘
Here, C is the consumption,
𝐂 is autonomous consumption
b is Marginal propensity to consume
Y is income
It reveals the behaviour of household consumption
expenditure with respect to the level of income
Saving function expresses functional relationship between
Saving (S) and national income (Y).
Thus, Saving (S) is a function of income (Y).
Algebraically, 𝐒 = −𝐂 + (𝟏 − 𝐛)𝐘
𝐂 is autonomous consumption
Here, C is the consumption,
(1 – b) is Marginal propensity to Save
Y is income
It reveals the behaviour of household saving with respect
to the level of income.
𝐘=𝐂+𝐒
𝐒=𝐘 − 𝐂
𝐒 = 𝐘 − (𝑪 + 𝒃𝒀)
𝐒 = 𝐘 − 𝑪 − 𝒃𝒀
𝐒 = −𝑪 + 𝒀 − 𝒃𝒀
𝐒 = −𝑪 + (𝟏 − 𝒃)𝒀
𝐂 = 𝐂 + 𝐛𝐘
𝐒 = −𝐂 + (𝟏 − 𝐛)𝐘
C = 100 + 0.6 Y
𝐂 = 𝐂 + 𝐛𝐘
𝐒 = −𝐂 + 𝟏 − 𝐛 𝐘
S = -100 + 0.4 Y
S = - 200 + 0.25 Y
C = 200 + 0.75 Y
Complete the following table:
Income
0
50
100
150
200
Saving
-20
-10
0
30
60
Marginal
propensity to
consume
----
Average
propensity to
consume
----
----
----
----
----
----
----
----
----
Y
0
50
100
S
-20
-10
0
C =Y - S
MPC =
∆𝐶
∆𝑌
𝐶
APC =
𝑌
20
---
60
40 =0.8
50
60 =1.2
50
100
40 =0.8
50
100 =1
100
20 =0.4
50
20 =0.4
50
120=0.8
150
140=0.7
200
150
30
120
200
60
140
---
Y
0
C
15
S =Y - C
-15
MPS = ∆ S APS =
∆Y
---
15 =0.3
50
S
Y
---
0 =0
50
50
50
0
100
85
15
15 =0.3 15 = 0.15
50
100
150
120
30
200
155
45
15 =0.3 30 =0.2
50
150
15 =0.3 45 =0.22
50
200
Complete the following table:
Y
MPC
S
0
---
-30
100
0.75
200
0.75
300
0.75
400
0.75
APC
Y
MPC
∆C
∆Y
S
(Y – C)
C
(Y – S)
APC
C
Y
0
---
-30
30
100
0.75
-5
105 =1.05
100
200
0.75
20
180 =0.9
200
300
0.75
400
0.75
---
MPC = ∆ C
∆Y
0.75 = ∆ C
100
75 = ∆ C
45
255 255 =0.85
C = 105
30 ++75
75=180
180
70
330
C = 105
300
330 =0.825
400
Complete the following table:
Y
APC
S
0
---
-80
100
1.6
200
1
300
0.8
MPC
APC =
Y
0
100
APC
C
(Y – S)
S
(Y – C)
MPC
---
80
-80
---
1.6
160
-60
80 =0.8
100
200
1
300
0.8
200
240
0
40 =0.4
100
60
40 =0.4
100
1.6 =
160 =
C
Y
C
100
C
Assignment on MPC and MPS
Q1. Complete the following table:
Income
Consumption MPC
400
240
500
320
600
395
700
465
MPS
Q2. If consumption function is 𝑪 = 𝟓𝟎𝟎 + 𝟎. 𝟔 𝒀, show with an
example that APC decreases as income increases.
Q3. Complete the following table:
Income
Consumption MPS
0
12
20
26
40
40
60
54
APC
Q4. Complete the following table:
Income
0
Consumption MPC
APS
40
120
0.8
200
0.8
280
0.8
Q5. Given below is the saving function:
𝑆 = −100 + 0.25𝑌. Show with a numerical example that APS rises with
an increase in income.
Q6. In an economy, total savings are ₹2000 crores and the
ratio of average propensity to save and average propensity to
consume is 2:7. Calculate the level of income in the economy.
Q7. In an economy the ratio of average propensity to
consume and average propensity to save is 5:3. If the level of
income is ₹6000, calculate the level of savings.
Q8. If national income is ₹90 crore and consumption is ₹81
crores, find out APS? When income rises to ₹100 crore and
consumption expenditure to ₹88 crores, what will be the
marginal propensity to consume and marginal propensity to
save?
Q9. If national income is ₹50 crores and saving is ₹5 crores,
find the value of APC. When income rises to ₹60 crores and
saving to ₹9 crores, what will be the APC and MPS?
Q10. Find the autonomous consumption and total consumption when
the saving function is
𝑆 = −100 + 0.5 𝑌 and Y = ₹1500 crores.
Private investment demand refers to the demand for
capital goods by producers.
Investment is of two types, Autonomous Investment and
Induced Investment, but in Keynes theory investment is
assumed to be Autonomous.
Induced Investment : It refers to the investment which is made with
the motive of earning profit.
It is affected by three factors
1. Income Level
2. Rate of interest (r)
Interest on borrowed capital
r is inversely related to induced
investment
Induced Investment
I
3.Marginal Efficiency of capital
(MEC)
Expected rate of return
Income
Induced Investment takes place only when
r < MEC
Autonomous Investment
Autonomous Investment : It refers to the investment which is made
without any profit motive.
It is not affected by income level, rate of interest or
marginal efficiency of capital.
I
Income
Induced Investment
Basis
Autonomous Investment
It refers to the investment which is made
with the motive of earning profit.
Motive
It refers to the investment
which is made without any
profit motive.
It is generally done by the private sector
Sector
It is generally done by the
government sector.
Income
Elasticity
It is income inelastic i.e. it does
not change with a change in the
national income.
It is income elastic i.e. if national income
goes up, induced investment also goes up.
This happens because an increase in national
income leads to an increase in the demand
for goods and services and for meeting the
same the investment also increases.
Curve
AD Schedule
Y
C
I
Autonomous
AD
0
20
10
30
20
25
10
35
40
30
10
40
60
35
10
45
80
40
10
50
100
45
10
55
120
50
10
60
(C + I)
AD (C+ I)
60
C
C, I , AD
50
Y
C
I
AD
0
20
10
30
20
25
10
35
40
30
10
40
60
35
10
45
80
40
10
50
100
45
10
55
120
50
10
60
40
30
20
I
10
0
20
40
60
80
Y/GDP
100
120
Aggregate Supply refers to the flow of goods and services
as planned by the producers during an accounting year.
Components of Aggregate Supply
whatever is produced an equal amount of income gets generated.
AS = Y
Y=C+S
AS = C + S
Hence components of AS are
Consumption and Saving.
AS
100
80
C, I , AD
60
40
20
45
0
20
40
60
80
Y/GDP
100
Y
AS
0
20
40
60
80
100
0
20
40
60
80
100
Short Run Equilibrium
Equilibrium output or
Equilibrium GDP or Equilibrium income
It refers to that level of output in the economy where:
AD = AS
Assumptions:
(i) Short period analysis: Equilibrium GDP according to Keynesian
theory is discussed only with reference to short period usually one
year.
(ii) Two Sector Closed Economy: Initially Keynes discussed the theory
of equilibrium GDP in the contest of a two sector closed economy.
Accordingly, AD = C + I.
(iii) AS is perfectly elastic: Keynes assumed that AS is perfectly elastic
i.e AS will adjust itself according to the AD. AS is perfectly elastic as
long as there is idle capacity or excess capacity existing in the
economy.
At Equilibrium, AD = AS
AD = C + I
&
AS = C + S

C+S =C+I

S=I
Approaches to determination of Equilibrium
Output (GDP) or Equilibrium Income
AD – AS
approach
S–I
approach
AS (Y)
AD – AS Approach
AD (C+ I)
60
E
C
C, I , AD
50
40
Point of Equilibrium
AD = AS
B
30
Break even point
Y=C
20
Equilibrium GDP
𝐂
I
10
0
20
40
60
80
Y/GDP
100
120
AD – AS Approach
AS (C + S)
AD (C+ I)
When AD > AS
E
Existing stocks of the
producer will be sold out.
C, I , AD
Producer will suffer a loss
of unfulfilled demand
Producer will plan an
increase in production
This will lead to increase in
income.
This will in turn lead to
increase in demand.
Q1
Q
AD > AS
AD = AS
Y/GDP
AS or Y (C + S)
AD – AS Approach
AD (C+ I)
When AD < AS
Existing stocks of the
producer will remain unsold.
E
C, I , AD
Producer will want to clear
unwanted stocks.
Hence they will plan a cut
in production
This will lead to decrease in
income.
This will in turn lead to
decrease in demand.
Q
Q1
AD = AS
AD < AS
Y/GDP
Savings, Investment
40
S (₹)
I (₹)
0
20
-20
10
50
60
-10
10
100
100
0
10
150
140
10
10
200
180
20
10
E
10
0
C (₹)
S
Point of Equilibrium
20
Y (₹)
50
100
150
I
200
-20
Eq. GDP
Income/ output
S<I
Leads to more consumption expenditure and more demand
Savings, Investment
Existing stocks of the producer will be sold out.
O
Producer will suffer a loss of unfulfilled demand
S
Producer will plan an increase in production
This will lead to increase in income.
This will in turn lead to increase in saving.
E
Q1
Q
S<I
S=I
I
Income/ output
S<I
Leads to less consumption expenditure and less demand
Savings, Investment
Existing stocks of the producer will remain unsold
O
Producer will want to clear unwanted stocks.
S
Producer will plan a cut in production
This will lead to decrease in income.
This will in turn lead to decrease in saving.
E
Q
S=I
I
Q1
S>I
Income/ output
Q. Find equilibrium S and equilibrium I when: Y = ₹ 4400,
MPC = 0.75 and 𝐂 = 𝟏𝟎𝟎
At equilibrium, S = I
Also, 𝐂 = 𝐂 + 𝐛𝐘
𝐂 = 𝟏𝟎𝟎 + 𝟎. 𝟕𝟓 × 𝟒𝟒𝟎𝟎
𝐂 = 𝟏𝟎𝟎 + 𝟑𝟑𝟎𝟎
𝐂 = ₹ 𝟑𝟒𝟎𝟎
We know that Y = C + S
∴ S=Y–C
S = 4400 – 3400 = 1000
At eq. S = I
∴ eq. S = eq. I = ₹ 1000
Q. S = - 25 + 0.5Y and I = 5000, find equilibrium Y and
equilibrium C.
At equilibrium, S = I
−𝟐𝟓 + 𝟎. 𝟓𝐘 = 𝟓𝟎𝟎𝟎
𝐒 = −𝐂 + (𝟏 − 𝐛)𝐘
𝟎. 𝟓𝐘 = 𝟓𝟎𝟐𝟓
𝟓𝟎𝟐𝟓
𝐘=
𝟎. 𝟓
𝐘 = 10050
We know at equilibrium, S = I
∴ S = 5000
Also, Y = C + S
∴ C=Y–S
C = 5050
C = 10050 – 5000 C = 10050 – 5000
Q. Given C = 400 + 0.9 Y and I = 4000, find equilibrium Y
and S and C at equilibrium .
At equilibrium,
S=I
−𝟒𝟎𝟎 + 𝟎. 𝟏 𝐘 = 𝟒𝟎𝟎𝟎
𝟎. 𝟏 𝐘 = 𝟒𝟎𝟎𝟎 + 𝟒𝟎𝟎
𝟒𝟒𝟎𝟎
𝐘=
𝟎. 𝟏
𝐘 = 𝟒𝟒𝟎𝟎𝟎
We know at equilibrium, S = I
∴ S = 4000
Also, Y = C + S
∴ C=Y–S
C = 44000 – 4000
C = 40000
C = 400 + 0.9 Y
Convert C into S
Since, 𝐒 = −𝐂 + (𝟏 − 𝐛)𝐘
∴ 𝐒 = −𝟒𝟎𝟎 + 𝟎. 𝟏 𝐘
An economy is in equilibrium. Calculate national income
from the following:
Autonomous consumption = ₹ 100
Marginal propensity to save = 0.2
Investment expenditure = ₹200
An economy is in equilibrium. Find marginal propensity to
consume from the following:
National Income = ₹2000
Autonomous Consumption = ₹400
Investment expenditure = ₹200
An economy is in equilibrium. Find investment expenditure
from the following:
National Income = ₹800
Marginal Propensity to Save = 0.3
Autonomous Consumption = ₹100
Y
AD1 (C+ I +I)
C, I , AD
E1
Additional investment
has Multiplier Effect
E
Q
AD (C + I )
Q1
Y/GDP
Y
AD (C + I )
C, I , AD
E
AD1 (C+ I - I)
E1
Q1
Q
Y/GDP
Investment Multiplier and its mechanism
Round
Increase in
Investment (  I )
Change in
Change in
income (  Y ) consumption ( C)
MPC = 0.5
Leakage or Saving
(S)
1
100
100
50
50
2
---
50
25
25
3
---
25
12.5
12.5
4
---
12.5
6.25
6.25
5
---
6.25
3.125
3.125
After multiple rounds
Total
100
200
100
100
Mathematically,
∆𝒀
𝒌=
∆𝑰
𝟏
𝒐𝒓 𝒌 =
𝟏 − 𝑴𝑷𝑪
𝟏
𝒐𝒓 𝒌 =
𝑴𝑷𝑺
𝟏
In the above example, 𝒌 =
𝟏 − 𝟎. 𝟓
i.e. 𝒌 =
𝟏
𝟎.𝟓
k and MPC have a
direct relation
&
k and MPS have
an inverse relation
=𝟐
Hence an additional investment generates two times income
Minimum and maximum values of k
MPC
Minimum Maximum
1
0
MPS
0
1
k
1
∞
There is increase in investment of ₹1000 crores in an
economy. Marginal propensity to consume is zero. What is
the total increase in income?
In an economy, investment increases by ₹120 crores. The
value of investment multiplier is 4. Calculate the marginal
propensity to consume.
In an economy, the equilibrium level of income is ₹12000
crore. The ratio of marginal propensity to consume and
marginal propensity to save is 3:1. Calculate the additional
investment needed to reach a new equilibrium level of
income of ₹20000 crore.
Change in
investment
Change in
demand
Change in
output
Change in
Change in
consumption
employment
Change in
income
Some essential concepts
Full Employment Equilibrium and
Underemployment Equilibrium
Full Employment Equilibrium refers to a situation in the
economy when AD = AS (or S = I) along with fuller
utilization of resources. This means that there is no idle/
excess capacity or unemployment in the economy.
Underemployment Equilibrium refers to a situation in the
economy when AD = AS (or S = I) but without fuller
utilization of resources. This means that there is idle/
excess capacity or unemployment in the economy even in
a state of equilibrium.
Voluntary and Involuntary unemployment
Involuntary unemployment refers to a situation when
people who are willing to work at the existing wage rate
are not getting employment.
The economy fails to create enough jobs because planned
output is lower than the potential output owing to lack of
demand.
Voluntary unemployment occurs when some people are
not willing to work at the existing wage rate or not willing
to work at all.
The problem of unemployment refers to the problem of
involuntary unemployment and not voluntary
unemployment.
Full Employment and Natural Unemployment
Full Employment refers to a situation in the economy when
all those who are able to work and are willing to work at
the prevailing wage rate are getting work.
In this situation at the prevailing wage rate, the demand
for labour = supply of labour i.e. the labour market is
cleared.refers to a situation in the economy when all those
who are able to work and are willing to work at the
prevailing wage rate are getting work.
Natural Unemployment occurs owing to the fact that there
are constant changes in the supply-demand parameters in
the economy and adjustment to these changes takes
time. While adjustments occur, some people continue to
remain unemployed. This situation causes ‘frictional’ and
‘structural’ unemployment in the economy.
Frictional unemployment and Structural
Unemployment
Frictional unemployment refers to the unemployment
associated with the changing of jobs in a dynamic
economy.
It arises due to immobility of labour, shortage of raw
material, lack of information regarding job opportunities,
shortage of power, wear and tear of machines, job hopping
etc.
Structural Unemployment is the unemployment that is a
result of the long – term decline of certain sectors or
industries.
It is associated with situations like short supply of other factors of
production, lack of skilled labourers for emerging industries, change
in production techniques etc.
Seasonal and Cyclic unemployment
Seasonal unemployment refers to the unemployment of
seasonal workers without jobs due to the time of year
where there are seasonal changes in employment.
Cyclic Unemployment is caused by a downturn in
the business cycle. It's part of the natural rise and fall of
economic growth that occurs over time. Cyclical
unemployment is temporary and depends on the length of
economic contractions caused by a recession. A typical
recession lasts around 18 months. When the business
cycle re-enters the expansionary phase (rising toward the
peak of the wave), the unemployed tend to be rehired.
Important
Full employment situation does not mean zero
unemployment
Owing to constantly changing supply – demand
parameters in the economy and adjustments taking
time, some frictional and structural unemployment
always exist.
This minimum rate of unemployment that exists
always in the economy is called the natural rate of
unemployment.
AS (Y)
EE
ADE
ADF
ADU
C, I , AD
EF
EU
Q
Q
Y/GDP
Deficient Demand : It refers to a situation when
AS (Y)aggregate demand is
ADUF of
less than aggregate supply corresponding to full employment level
output in the economy.
Hence Deficient Demand is a situation when
EF
AD < AS corresponding to full employment in the economy
C, I , AD
Deficient Demand
EU
When AD < AS corr. to full employment
Y/GDP
1. Reduction in Private Final Consumption Expenditure
2. Reduction in Private Investment Expenditure
3. Reduction in Government Expenditure
4. Decline in Exports
5. Rise in Imports
6. Increase in taxes
Underemployment Equilibrium
1
Producers are not able to fully utilize their resources
Deflationary Gap
2
Consequences
of Deficient
Demand
Inducement to invest is hurt. Low investment leads
to low output. Implying low income and low
demand once again.
Undesired Stocks
3
4
Producers are not able to sell all that they plan to sell.
Accordingly undesired stocks tend to pile up. This
leads to fall in the prices and fall in the planned output
for the year ahead.
Loss of Profits
This happens because (i) the producers are not able
to clear their stocks and (ii) undesired stocks lead to
‘price crash.
Fiscal Policy:It refers to the receipt and expenditure policy
of the government and is also known as the Budgetary
Policy of the government.
Borrowing from RBI
Government Expenditure
Borrowing from RBI is
increased which leads to
greater liquidity in the
economy.
Govt. expenditure includes
expenditure on construction of
roads, dams bridges, expenditure
on education, health, defense,
maintenance of law and order,
expenditure on subsidies etc.
Public Borrowing/
Public Debt
The govt. reduces borrowing
from the public. Rather it
pays back the money already
borrowed from the public.
4
3
1
2
Taxes
By reducing the tax burden on the
households, the govt. increases
their disposable income. This
results in a rise in AD.
Monetary Policy
02
Bank Rate/Repo Rate
Open Market Operations
RBI will buy back approved securities from the open
market to increase liquidity in the economy.
04
Statutory Liquid Ratio
RBI will decrease the SLR. This will leave more
liquidity with the banks and they will be able to
create more credit
06
Margin Requirement
RBI will reduce margin requirement so that more
people are able to take loans.
08
Credit Rationing
Credit rationing, if any in force, is withdrawn to
enhance the availability of credit
01
Bank rate/repo rate will be lowered to increase
credit flow in the economy.
Cash Reserve Ratio
03
RBI will decrease the CRR. This will leave more
liquidity with the banks and they will be able to
create more credit
Reverse Repo Rate
05
RBI will lower reverse repo rate. This will force
banks to not park surplus funds with RBI
instead give them out as loans.
Moral Suasion
RBI will exert moral pressure on the
commercial banks to be liberal in lending.
07
Excess Demand : It refers to a situationAS
when
(Y) aggregate demand is
more than aggregate supply corresponding to full employment level of
output in the economy.
EE
ADEF
Hence Excess Demand is a situation when
AD > AS corresponding to full employment in the economy
Excess Demand
C, I , AD
EF
When AD > AS corr. to full employment
Y/GDP
1. Increase in Private Final Consumption Expenditure
2. Increase in Private Investment Expenditure
3. Increase in Government Expenditure
4. Rise in Exports
5. Decline in Imports
6. Decrease in taxes
Inflationary Gap
Output cannot rise as factors are already fully
employed. This creates a pressure of the demand for
existing resources. Accordingly cost of production
rises which leads to a rise in the general price level.
1
Static GDP
Consequences
of Excess
Demand
2
Even when the level of AD is higher than its full
employment level, the level of GDP does not rise.
It remains static.
Excess Demand and Wage – Price
Spiral
3
Owing to high pressure of the resources, the cost of
production (particularly wages) rise.
Rise in cost of production and wages leads to a rise in
general price level.
Rise in prices leads to arise in cost of living.
Rise in cost of living leads to rise in wages again.
Fiscal Policy:It refers to the receipt and expenditure policy
of the government and is also known as the Budgetary
Policy of the government.
Borrowing from RBI
Government Expenditure
Borrowing from RBI is
reduced which leads to
lesser liquidity in the
economy.
Govt. expenditure includes
expenditure on construction of
roads, dams bridges, expenditure
on education, health, defense,
maintenance of law and order,
expenditure on subsidies etc.
Public Borrowing/
Public Debt
The govt. increases
borrowing from the public,
thereby reducing liquidity in
the system.
4
3
1
2
Taxes
By increasing the tax burden on
the households, the govt.
decreases their disposable income.
This results in a fall in AD.
Monetary Policy
02
Bank Rate/Repo Rate
Open Market Operations
RBI will sell govt. securities from the open market
to increase liquidity in the economy.
04
Statutory Liquid Ratio
RBI will increase the SLR. This will leave less
liquidity with the banks and they will be able to
create less credit
06
Margin Requirement
RBI will increase margin requirement so that less
people take loans.
08
Credit Rationing
Credit rationing will be implemented to reduce
the availability of credit
01
Bank rate/repo rate will be increased to reduce
credit flow in the economy.
Cash Reserve Ratio
03
RBI will increase the CRR. This will leave less
liquidity with the banks and they will be able to
create less credit
Reverse Repo Rate
05
RBI will increase reverse repo rate. Hence the
banks will park surplus funds with RBI instead
of giving them out as loans.
Moral Suasion
RBI will exert moral pressure on the
commercial banks to be strict in lending.
07