Explain the concept of deficient demand. How can government spending policy be helpful in correcting the situation of deficient demand ?

Question

Accepted Answer

**Deficient Demand** refers to the situation when aggregate demand is less than aggregate supply corresponding to the full employment level of output. It means the total expenditure in the economy falls short of what is needed to purchase the full employment output. This leads to fall in output, income and employment, causing unemployment.

**Government spending policy to correct deficient demand:**
- **Increase in Government Spending:** Government can increase its expenditure on infrastructure, health, education etc. This directly boosts aggregate demand
- **Increase in Transfer Payments:** Higher spending on subsidies, unemployment benefits increases disposable income of households, raising consumption expenditure
- **Public Works Programmes:** Launching employment generation schemes creates jobs and puts money in hands of workers, increasing demand
- The increase in government spending has a multiplier effect, leading to a larger increase in national income