‘An economy is operating at under-employment level of income’. What is meant by the given statement? Discuss one fiscal measure and one monetary measure to tackle the situation.

Explanation

An economy is said to be operating at under employment euilibrium level, if the planned aggregate ependiture falls short of available output in the economy, corresponding to the full employment level. It results into ecess of output available over the anticipated aggregate demand at full employment level. To tackle such a situation the aggregate demand has to be increased up to the level that the stocks can be cleared.
Following measures may be taken for the same :
(i) Decrease in taxes : The government under its fiscal policy may decrease the rate of taxes (both direct and indirect taxes). This will ensure greater purchasing power in the hands of general public. This will help to increase aggregate demand and remove the deflationary gap.
(ii) Increase in money supply : Central bank through its epansionary monetary policy can increase the money supply in the economy. Central bank can use tools like bank rate, cash reserve ratio, repo and reverse repo rates etc. to ensure greater money in the hands of general public which would in turn increase the aggregate demand in the economy and be helpful in reducingremoving the deflationary gap