Answer to Question #204192 in Macroeconomics for mishaal

Question

explain which measures can be taken to remove deflationary gap (at least two).

Answer 1

The measures to be taken to remove deflationary gap are as follows;

1. Monetary policy - whereby money supply and credit are controlled by the central bank.
2. Fiscal policy - this policy is used to incline the aggregate demand by using techniques such as reduction of taxes and creating more investments in the economy.

Monetary policy

The main goal of this policy is to improve the spending of firms through increased investments.

Credit should be made available and affordable through measures such as:

Conducting open market operation where commercial banks are enabled to improve their lending capacity and their available cash through the sell of securities to the central bank of the country.

Commercial banks can also reduce or raise the interest rate on money that is lend according to how the situation of the economy is.

The central bank can also ration credit after surveying the how a country is depressed economically. In this case credit will only be injected into the areas that are more desirable in the economy.

Fiscal policy

This policy looks at how the government spends money and how taxation is carried out. In order to reduce the deflationary gap, the government is supposed to increase the aggregate demand and this is effectively done by increasing the supply of money in the economy. The government is supposed to make big investments when there is a decline in demand. This is so as to increase the cash in the hands of the consumers and this will encourage them to spend more money.

Taxes should generally be reduced . Personal income tax should be cut down and incomes for the lowly earning groups should be completely removed.