Following Observations Highlight how Monetary Policy is used to correct deficient demand :
- 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.
- Securities are purchased by the RBI in the open market to inject liquidity into the system. This raises AD.
- 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.
- 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.
- 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.
- Credit rationing, if already in force, is withdrawn. Availability of credit becomes easy. Accordingly, borrowing increased and AD rises.
