Following Observations Highlight how Monetary Policy is used to correct deficient demand :
(i) Repo/Bank rate is lowered, following which market rate of interest is reduced. This implies a cut the cost of credit. Accordingly, demand for credit increases. Implying a rise in AD, as required to correct deficient demand.
(ii) Securities are purchased by the RBI in the open market to inject liquidity into the system. This raises AD.
(iii) CRR and SLR are lowered. This raises capacity of the commercial banks to create credit. Availability of credit. Availability of credit increases. Accordingly, AD tends to rise.
(iv) Margin Requirement is reduced. This makes credit more attractive. Accordingly, borrowing increases causing a rise in AD. Moral Pressure is exerted by the central bank on the commercial banks to be liberal in lending, so that demand for credit increases and AD is raised.
(v) Moral Pressure is exerted by the Central Bank on the Commercial Banks to be liberal in lending, so that demand for credit increases and AD is raised.
(vi) Credit rationing, if already in force, is withdrawn. Availability of credit becomes easy. Accordingly, borrowing increased and AD rises.
