Question

Read the following text carefully :
In an economy, a significant reduction in Aggregate demand raised concerns about future growth prospects of the country. This economic downturn underscores the urgent need for strategic measures to boost confidence of households and stimulate economic activities. Based on the above text and common understanding, explain the measures which the government may take to stabilise the indicated situation.

Answer 1

To stabilize the economy during a downturn in aggregate demand, the government can take a combination of monetary and fiscal measures to stimulate economic activity. These measures would help restore confidence in the economy, increase spending, and create jobs. The following measures can be taken:

1. Monetary Policy Measures: 
  - Lowering Interest Rates: The Reserve Bank of India (RBI) can reduce interest rates to make borrowing cheaper for businesses and consumers. Lower rates encourage investment and consumption, boosting demand. 
  - Quantitative Easing: If conventional monetary policy is not effective, the RBI can engage in quantitative easing by purchasing government bonds to inject liquidity into the economy. This can help increase money supply and lower long-term interest rates. 

2. Fiscal Policy Measures:  
  - Increase in Government Spending: The government can increase its spending on infrastructure projects, healthcare, education, and social welfare programs. This will generate employment, boost demand, and stimulate economic activity. 
  - Tax Cuts: The government can reduce taxes on individuals and businesses to increase disposable income and incentivize investment. Lower taxes on goods and services can also increase consumption.   
  - Subsidies and Incentives: Providing subsidies on essential goods, such as fuel and food, can help reduce the burden on households and ensure that consumption continues. The government can also offer incentives to businesses to encourage production and investment.

3. Boosting Confidence and Investment: 
  - Investor Confidence Measures: The government can work on improving investor confidence by ensuring stable policies, protecting property rights, and making the business environment more conducive to investment. 
  - Promotion of Exports: The government can focus on increasing exports by negotiating better trade agreements, providing export incentives, and boosting the competitiveness of Indian products in global markets. 

These measures, taken in combination, would help stabilize the economy by increasing aggregate demand, stimulating investment, and fostering economic growth.