Page 4 - Lesson Note 46 (1)

When government reduces its demand for goods and services due to fall

in public expenditure, it leads to deficient demand.

4. Fall in Investment expenditure:

Increase in the rate of interest or fall in the expected returns lead to

decrease in the investment expenditure. It reduces the AD and gives rise
to deficient demand.

5. Rise in Imports:

When international prices are comparatively less than the domestic
prices, then it may lead to a rise in imports, implying a cut in the
aggregate demand.

6. Fall in Exports:

Exports may fall due to comparatively higher prices of domestic goods or
due to increase in the exchange rate for domestic currency. This will lead
to deficient demand.

Impact of Deficient Demand:
Deficient demand creates many difficulties in the economy due to its
deflationary nature. Generally, deficient demand adversely affects the
level of output, employment and price level in the economy.

1. Effect on Output:

Due to lack of sufficient aggregate demand, there will be an increase in
the inventory stock. It will force the firms to plan for lesser production
for the subsequent period. As a result, planned output will fall.

2. Effect on Employment:

Deficient demand causes involuntary unemployment in the economy

due to fall in the planned output.

3. Effect on General Price Level:

Deficient demand causes the general prices to fall due to lack of demand

for goods and services in the economy.