Page 4 - Lesson Note-47 (1)

• During excess demand situation the margin requirement is to be

increased, that will result a contraction in credit creation power of
commercial bank and check in money supply into the economy.
• Purchasing power in the economy reduces, aggregate demand
falls and excess demand situation is corrected.
The reverse is true in case of deficient demand

Moral suasion: -

It is a combination of Persuasion and pressure that the central bank

applies to other banks in order to get them fall in line with its policy

• During excess demand situation the central bank should adopt the
dear money policy.
• During Deficient demand situation the central bank should adopt
the cheap money policy.

Selective credit controls: -

It refers to a method in which the central bank gives directions to
other banks to give or not to give credit for certain purposes to
particular sectors. During deficient demand, the central bank
withdraws rationing of credit and make efforts to encourage
credit.

Fiscal Policy Measures

The policy related to revenue and expenditure of the Government with a
view to correct the situation of excess demand or deficient demand in
the economy.

Instruments of fiscal policy

Government Expenditure or Spending
Government
Revenue

Taxes Public Debt Deficit Financing