Could you please tell me, in the case of an umbalance of the type Y<A, what would be the changes to solve it?

Question

Could you please tell me, in the case of an umbalance of the type Y<A, what would be the changes to solve it?

Answer 1

What is Y and what is A. If A is aggregate demand and Y is the Fullemployment output,

Y&lt; A means, there is excess demand (output falls short of demand and output can be expanded as the economy has already reached full employment of all resources). So there will be inflation. The problem can be solved by reducing demand. This can be done by Fiscal policy of raising tax rates, raisning interest rates, reducing govt. expenditure, reduceing subsidies for investment, reducing money supply through open market operations and raising the cash reserves ration.

If A is aggregate demand and Y is the Fullemployment output,

Y&lt; A means, there is excess demand (output falls short of demand and output can not be expanded as the economy has already reached full employment of all resources). So there will be inflation. The problem can be solved by reducing demand. This can be done by Fiscal policy of raising tax rates, raisning interest rates, reducing govt. expenditure, reduceing subsidies for investment, reducing money supply through open market operations and raising the cash reserves ratio..

If Y is aggregate demand and A is the Full employment output,

Y&lt; A means, there is excess capacity available (and shortage of demand and output can be expanded as the economy has not reached full employment of all resources). So there will be deflation. The problem can be solved by increasing demand. This can be done by Fiscal policy of lowering tax rates, reducing interest rates, increasing govt. expenditure, adding new subsidies for investment, increasing money supply through open market operations and lowering the cash reserves ratio..