Exante demand, Ex post demand , Aggregate demand , Propensity to save and consume, Investment multiplier, Full employment , excess demand and excessive demand. Deficient demand.
The document defines key macroeconomic concepts such as aggregate demand, aggregate supply, and their components. It discusses how equilibrium output is determined by the intersection of the aggregate demand and aggregate supply curves. The saving-investment approach to determining equilibrium is also covered, where equilibrium occurs at the point where planned saving equals planned investment. Factors that can cause excess demand and deficient demand are explained, along with their impacts and appropriate policy responses.
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There are three main approaches to measuring national income: the income approach, expenditure approach, and product/output approach. The income approach adds up all incomes received, the expenditure approach adds up all expenditures, and the product approach measures the total value of final goods produced. National income is determined by factors such as technology, human capital, policies, resources, and market size. While per capita income measures average income, it does not fully capture living standards. National income equilibrium is reached when aggregate demand equals aggregate supply according to the two-sector model.
The document discusses the economic concept of the multiplier. It provides three key points:
1) A multiplier measures how much an economic variable (like income or output) changes in response to a change in another variable (like investment or government spending). For example, a $100 increase in investment may lead to a $300 increase in income, so the multiplier is 3.
2) The multiplier captures the ripple effect of spending as income from the initial transaction is spent again and again in the economy. This leads to a larger increase in overall income than the initial change in spending.
3) The size of the multiplier depends on the marginal propensity to consume (MPC). A higher MPC means more
This document provides an overview of consumption theory including key concepts like the consumption function, marginal propensity to consume, average propensity to consume, and the psychological law of consumption. It also discusses saving functions, investment, and factors that influence consumption, saving, and investment decisions. Some of the main points covered include defining consumption and savings, the relationship between income and consumption, linear and nonlinear consumption functions, and how consumption, savings, and investment interact in an economy.
This document discusses key concepts related to consumption functions in economics. It defines consumption as aggregate expenditure on goods and services to satisfy wants. Consumption is determined by and a function of income (C=f(Y)). The simple consumption function is expressed as C=C0+C1Y, where C0 is autonomous consumption and C1 is the marginal propensity to consume. Autonomous consumption refers to minimum spending needed even without income. The document also discusses average and marginal propensity to consume, save, and invest, and how these relate to the multiplier concept in economics.
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This document defines key macroeconomic concepts related to aggregate demand and supply. It explains that:
1. Aggregate demand is the total planned expenditure on final goods and services and equals consumption + investment + government spending + net exports. Consumption and investment make up aggregate demand in a simple two-sector economy.
2. Aggregate supply is the total planned output of final goods and services and equals national income. National income equals consumption + savings at the national level.
3. The consumption function shows the relationship between consumption and national income, where consumption has an autonomous and induced component. The marginal propensity to consume is the change in consumption from a change in income.
The document discusses the concepts of equilibrium income, excess demand, deficient demand, and the multiplier effect in Keynesian economics. It provides definitions and diagrams to illustrate:
1) Equilibrium income is determined by the point where aggregate demand (AD) equals aggregate supply (AS). The economy can be at full employment, under-employment, or over-employment.
2) Excess demand occurs when AD is greater than AS at full employment, leading to inflation. Deficient demand is when AD is less than AS, resulting in under-employment.
3) The investment multiplier shows how a initial change in investment causes a multiplied change in equilibrium income through subsequent rounds of spending. A higher multiplier coefficient corresponds to
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The document defines key macroeconomic concepts such as aggregate demand, aggregate supply, and their components. It discusses how equilibrium output is determined by the intersection of the aggregate demand and aggregate supply curves. The saving-investment approach to determining equilibrium is also covered, where equilibrium occurs at the point where planned saving equals planned investment. Factors that can cause excess demand and deficient demand are explained, along with their impacts and appropriate policy responses.
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There are three main approaches to measuring national income: the income approach, expenditure approach, and product/output approach. The income approach adds up all incomes received, the expenditure approach adds up all expenditures, and the product approach measures the total value of final goods produced. National income is determined by factors such as technology, human capital, policies, resources, and market size. While per capita income measures average income, it does not fully capture living standards. National income equilibrium is reached when aggregate demand equals aggregate supply according to the two-sector model.
The document discusses the economic concept of the multiplier. It provides three key points:
1) A multiplier measures how much an economic variable (like income or output) changes in response to a change in another variable (like investment or government spending). For example, a $100 increase in investment may lead to a $300 increase in income, so the multiplier is 3.
2) The multiplier captures the ripple effect of spending as income from the initial transaction is spent again and again in the economy. This leads to a larger increase in overall income than the initial change in spending.
3) The size of the multiplier depends on the marginal propensity to consume (MPC). A higher MPC means more
This document provides an overview of consumption theory including key concepts like the consumption function, marginal propensity to consume, average propensity to consume, and the psychological law of consumption. It also discusses saving functions, investment, and factors that influence consumption, saving, and investment decisions. Some of the main points covered include defining consumption and savings, the relationship between income and consumption, linear and nonlinear consumption functions, and how consumption, savings, and investment interact in an economy.
This document discusses key concepts related to consumption functions in economics. It defines consumption as aggregate expenditure on goods and services to satisfy wants. Consumption is determined by and a function of income (C=f(Y)). The simple consumption function is expressed as C=C0+C1Y, where C0 is autonomous consumption and C1 is the marginal propensity to consume. Autonomous consumption refers to minimum spending needed even without income. The document also discusses average and marginal propensity to consume, save, and invest, and how these relate to the multiplier concept in economics.
Determination of income and employment important notesVijay Kumar
This document defines key macroeconomic concepts related to aggregate demand and supply. It explains that:
1. Aggregate demand is the total planned expenditure on final goods and services and equals consumption + investment + government spending + net exports. Consumption and investment make up aggregate demand in a simple two-sector economy.
2. Aggregate supply is the total planned output of final goods and services and equals national income. National income equals consumption + savings at the national level.
3. The consumption function shows the relationship between consumption and national income, where consumption has an autonomous and induced component. The marginal propensity to consume is the change in consumption from a change in income.
The document discusses the concepts of equilibrium income, excess demand, deficient demand, and the multiplier effect in Keynesian economics. It provides definitions and diagrams to illustrate:
1) Equilibrium income is determined by the point where aggregate demand (AD) equals aggregate supply (AS). The economy can be at full employment, under-employment, or over-employment.
2) Excess demand occurs when AD is greater than AS at full employment, leading to inflation. Deficient demand is when AD is less than AS, resulting in under-employment.
3) The investment multiplier shows how a initial change in investment causes a multiplied change in equilibrium income through subsequent rounds of spending. A higher multiplier coefficient corresponds to
Keynesian Aggregate demand and aggregate supply income analysisPratikMilanSahoo
This presentation describes the Keynesian model of the economy after the 1929 depression. Aggregate demand aggregate supply with equilibrium and Factors affecting the theory and criticism to Keynesian theory.
This document discusses key concepts in economics related to income determination, including MPC, MPS, APC, APS, consumption functions, and the AD-AS approaches. It provides examples and solutions to calculate these values based on income and consumption data. It also reviews investment functions, full employment, and definitions of related economic equilibrium states.
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This document provides definitions and explanations of key concepts in Keynesian economics that will be used to analyze how changes in the economy and policy affect real GDP, employment, and prices using the AD-AS model. It defines aggregate demand, aggregate supply, GDP, disposable income, consumption, saving, average and marginal propensities to consume and save, and other economic terms. The relationships between these concepts will be important for understanding unit III.
This document provides definitions and explanations of key concepts in Keynesian economics that will be used to analyze how changes in the economy and policy affect real GDP, employment, and prices using the AD-AS model. It defines aggregate demand, aggregate supply, GDP, disposable income, consumption, saving, average and marginal propensities to consume and save, and other economic terms. The relationships between these concepts will be important for understanding unit III.
1. The document discusses key concepts related to aggregate demand, aggregate supply, and their components. It defines aggregate demand as the total expenditure on final goods and services in an economy, and identifies its main components as private consumption, investment, government expenditure, and net exports.
2. Aggregate supply is defined as the total production of goods and services in an economy. Its main components are consumption and savings. The relationship between consumption, income, and savings is also explained using consumption and savings functions.
3. Important concepts like average propensity to consume, marginal propensity to consume, and their properties are summarized. The relationship between different macroeconomic variables like income, consumption, savings, aggregate demand, and aggregate supply
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2. The author proposes studying whether GDP is the authentic indicator of a country's economic well-being and development, or if other indicators should also be considered for sustainable growth.
3. The document outlines GDP calculation methods and defines GDP as the total value of goods and services produced in a country in a year. It explains how GDP can be measured through expenditure and income approaches and how these two values are always equal.
This document provides an overview of the simple Keynesian model of income determination. It discusses the key components of aggregate expenditure, including consumption which depends on disposable income, and investment which depends on the marginal efficiency of capital and interest rates. The aggregate output is determined by the factors of production using a production function. Equilibrium income is reached at the point where aggregate expenditure and aggregate output intersect, establishing equilibrium in the goods market.
The document discusses key concepts in aggregate demand and demand-side stabilization policies according to the Keynesian model. It defines aggregate demand and its components. It then explains the Keynesian model's goal of using fiscal policy tools like government spending, taxation, to increase or decrease total demand and stabilize GDP and unemployment. The multiplier effect is discussed as how a change in spending can impact GDP multiple times through subsequent rounds of consumption. The relationships between income, consumption, savings, and how these determine the multiplier are also summarized.
There are two approaches to determining the equilibrium level of income and employment in an economy according to Keynesian theory: the aggregate demand-aggregate supply (AD-AS) approach and the saving-investment (S-I) approach. Equilibrium is achieved under both approaches when planned aggregate demand equals planned aggregate supply or when planned saving equals planned investment. Deviations from equilibrium will trigger adjustments through changes in output and employment that bring the economy back to equilibrium. Key assumptions include a two-sector model of households and firms, autonomous investment, a fixed price level, and analysis in the short-run context.
Keynesian economic theory proposes that recessions can occur due to a lack of aggregate demand in the economy. Aggregate demand is the total demand for goods and services and is composed of consumption, investment, government spending, and net exports. Keynes argued that consumption depends largely on current income levels and that increases in income do not directly translate to equal increases in consumption. This means that as incomes rise, savings also rise, but consumption increases at a lower rate, which can lead to inadequate aggregate demand and recessions if not offset by increases in other components of aggregate demand like investment or government spending.
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The document discusses key macroeconomic concepts including aggregate demand, aggregate supply, the consumption function, investment function, and the multiplier. It provides the following key points:
- Aggregate demand is the total demand for final goods and services in an economy. It is affected by factors like money, taxes, prices, and trade.
- Aggregate supply represents the maximum output an economy can produce at full employment. It can shift due to changes in inputs like labor, capital, technology and costs.
- The consumption function explains autonomous and induced consumption and how consumption relates to disposable income based on the marginal propensity to consume.
- The investment function depends on interest rates, profit expectations and taxes, and
The document discusses key macroeconomic concepts including aggregate demand, aggregate supply, the consumption function, investment function, and the multiplier. It provides details on how each of these factors impact macroeconomic variables like output, employment, prices, and trade. It also examines the relationship between aggregate demand and supply using the AD-AS framework and how this intersection determines macroeconomic equilibrium.
- The document discusses aggregate demand (AD) and how it determines national income and economic fluctuations.
- It introduces the IS-LM model, which shows how interest rates link investment and money demand to determine the position and slope of the AD curve and the level of national income in the short-run.
- The model examines how fiscal policy tools like government spending and taxes can be used by policymakers to influence aggregate demand.
The document discusses the concept of the multiplier, which was originally developed by F.A. Kahn in the 1930s to analyze how an initial increase in investment leads to further increases in income and employment through subsequent rounds of spending. It describes how Keynes later refined the multiplier concept. It provides equations to calculate the multiplier based on the marginal propensity to consume. It also discusses limiting cases when the MPC is 1 or 0 and factors that can cause "leakages" from the multiplier process, reducing its effectiveness. Finally, it distinguishes between the static and dynamic multiplier models.
Consumption refers to the use of goods and services to satisfy human wants. It is undertaken by households as well as businesses and governments. There are two types of consumption - household consumption which directly satisfies wants, and business consumption which indirectly satisfies wants by providing income to households.
The consumption function shows that consumption is determined by national or factor income. Initially, consumption may exceed income as households borrow from savings. The multiplier concept demonstrates how income is generated through the circular flow of spending as each dollar of income is spent and respent in the economy. The multiplier effect depends on the marginal propensity to consume versus the marginal propensity to save.
Factors like tastes and preferences, population size, income levels, prices, and
This document provides an overview of consumption functions and related economic concepts. It defines consumption expenditure and discusses its graphical representation. It also examines the relationship between consumption expenditure and factors like wealth, interest rates, and income. Key concepts discussed include the average propensity to consume, marginal propensity to consume, saving function, average propensity to save, and marginal propensity to save. Graphs are used to illustrate these relationships and how consumption and savings change with different levels of income.
The document discusses the Keynesian multiplier theory and the concept of the multiplier. It explains that the multiplier is a ratio that shows the total change in income resulting from an initial change in investment. A higher marginal propensity to consume (MPC) leads to a higher multiplier value. The document also introduces the supermultiplier concept developed by John Maynard Keynes, which accounts for induced investment in addition to induced consumption. It provides an example of how the supermultiplier process works over multiple periods.
The document discusses the Keynesian multiplier theory and the concept of the multiplier. It explains that the multiplier captures the cumulative effect of a change in investment on national income through induced consumption. The value of the multiplier depends on the marginal propensity to consume (MPC) and is determined as 1/(1-MPC). The document provides an example of the multiplier process showing how an initial investment leads to increasing rounds of consumption and income. It also discusses some assumptions and limitations of the multiplier model.
Consumption, Investment and Stabilization(1).pptxYAshuMuchhal
The document discusses key concepts in macroeconomics related to consumption, investment, and stabilization policy. It covers Keynes' consumption function, including the average propensity to consume (APC) and marginal propensity to consume (MPC). It also discusses empirical estimates of the consumption function and attempts to reconcile short-run and long-run consumption functions. The document then covers investment and the desired capital stock, as well as goods market equilibrium where supply equals demand as Y=C+I+G.
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Theory of Income and Employment - Economics 12th ISC Refresher course.pptx
1. Theory of income and Employment
Economics 12th ISC Refresher course
2. Exante Demand
• Exante demand refers to the desired demand or planned demand during the
period of one year.
• This is the market demand which is intented to be expected in the economy
during the period of one year.
3. Ex post demand (effective)
• Ex-post aggregate demand refers to the actual demand in the economy
during the period of one year.
• Actual consumer spending and business capital investment are
included in ex-post aggregate demand.
• In other words, the ex-post describes what actually occurred.
4. Aggregate demand and its components
Aggregated demand means the total demand for final goods and services in an economy.
It is the total (final) expenditure of all the units of the economy, i.e., households, firms,
government, and the rest of the world.
• Aggregate Demand refers to the desired level of expenditure in the economy during an
accounting year. It is what people wish to spend on the purchase of goods and services
during an accounting year. Aggregate demand= C+I+G+ (X-M) where
• C= Consumption expenditure
I= Investment expenditure
G= Government expenditure
(X-M)= Net export, where X= Exports and M= Imports.
5. Marginal propensity to save
• Marginal Propensity to Save or MPS is a concept propounded in Keynesian macroeconomic
theory, which refers to the proportion of any additional income that is saved by a consumer
rather than utilizing it for spending on the consumption of goods and services.
• In other words, it shows how much an individual is willing to save when he receives some
additional income. For example, if we say MPS is 2%, then the individual is willing to save 2
rupees for every 100 rupees earned by him.
• MPS is represented by a savings line which is a sloped line that is created by putting change
in savings on the y-axis (vertical) and change in income on the x-axis (horizontal)
6. Marginal Propensity to save
Any change in government expenditure will lead to an increase in
disposable income that will lead to increased consumption. The
increased consumption will result in an increase in disposable
income for other sectors, which leads to further consumption.
Calculating MPS
MPS is calculated using the following formula
MPS = Change in Savings (ΔS) / Change in Disposable Income
(ΔY)
7. Marginal propensity to Save
Y
S S= -a+(1-b) y
dS
dY
MPC = b
MPS= 1-b or
dS/dY
-a Autonomous saving
( negative at low
income)
8. Marginal propensity to Consume
• Marginal Propensity to Consume or MPC is an important component of the Keynesian
macroeconomic theory. This theory suggests that the individual has a propensity to consume more
with an additional rise in income.
• In other words, Marginal Propensity to Consume (MPC) measures the proportionate rise in the
consumption with increase in income or we can say it measures the proportion of extra pay that is
spent on consumption of goods and services rather than saving it.
• Marginal Propensity to Consume or MPC is dependent on the income level. It may vary with the
income levels and it can be seen that the MPC is lower at higher income levels.
• MPC can be calculated by determining the change in consumption divided by the change in income.
• MPC is represented by the consumption line, which is a sloped line that is formed when change in
consumption is plotted on the vertical y-axis with change in income on the horizontal x-axis.
9. Marginal propensity to consume
Consumption
Income
MPC = C
Y
C= Change in consumption
Y= Change in Income
10. Average propensity to consume
• The average propensity to consume (APC) is a measure of the fraction of the total
disposable income consumed. It is considered a significant concept for both
individual consumers and economists.
• The average propensity to consume (APC) is the cumulative measure of the
fraction of spent income.
• The APC is graphically represented by the slope of the consumption function.
• An estimate of the average propensity to consume not only shows the proportion
of household income that is saved but also the total amount saved.
11. Average Propensity to Save
• The ratio of total saving to total income is called APS. Alternatively, it is that part of
total income which is saved.
• By dividing total saving (S) with total income (Y), we get APS
• APS = S/Y
• For instance, in the following table when national income is Rs 200 crore, saving is
Rs 30 crore. In this case APS = SA’ = 30/200 = 0.15 or 15%.
12. Equilibrium output ( Aggregate demand and
Aggregate supply approach )
According to the Keynesian theory, the equilibrium level of income in an
economy is determined at the intersection point of AD and AS curves.
Aggregate demand
Aggregate demand means the total demand for final goods in an economy.
• The AD curve has a positive slope, which means that when income increases, AD (expenditure) also increases. It is
represented by C + I.
• Aggregate supply
• It is the value of the total quantity of final goods and services produced in the economic territory of a country.
An aggregate supply curve is the sum total of consumption and saving.It is a positively sloped 45° straight line curve
starting from the origin.
13. E AD=C+I
C= C +cY
AS = Y=
Expenditure
T
Planned output
45°
I
C
AD
Planned expenditure
14. Aggregate demand is more than Aggregate supply.
• When AD > AS
• i.e., the economy is operating at any level before the equilibrium
• It means that households and firms taken together are willing to buy more than what the firms are
planning to produce, i.e., the AD curve lies below the AS curve.
• It would lead to the unplanned and undesired decrease in inventories.
• Remedy
• If some unemployed or under-employed resources are there in the economy, firms would utilise them
and increase production.
• This will increase the level of income and employment.
This process of increase in the output will continue until the economy reaches the equilibrium level,
where AD = AS.
15. Aggregate demand is less than Aggregate supply.
• It means that households and firms taken together are willing to buy less than what the firms are planning to
produce, i.e., the AD curve lies above the AS curve.
It would lead to unplanned/unwanted accumulation of inventories.
• Remedy
• In this situation, firms would decrease production and employment.
• This will decrease the level of income as well as the aggregate demand.
This process of decrease in the output and income will continue until the economy reaches the equilibrium level,
where AD = AS.
16. Equilibrium output (Savings and Investment
Approach )
S
1
Y
M1
I
E1
S=I
Equilibrium
I=S
o
Y’
Saving / Investment
Income / Output / Employment
17. Equilibrium output: Savings and Investment
approach
• According to this approach of equilibrium, the equilibrium is reached only when Investment(I)
equals Savings(S) because at this level there is no tendency for income and output to change.
• In the diagram the equilibrium is at E where savings intersects investment curve At this point,
I=S.
• When S is more than I , then the planned inventory would fall below the desired level. To bring
back the Inventory at the desired level, the producers expand the output More output means
more income. Rise in output means rise in I and rise in income means rise in S. Both continue to
rise till they reach E, S=I.
• When S is less than I, then the planned inventory rises above the desired level. To clear the
unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I.
• So, equilibrium takes place only at point E, when S=I.
18. Investment multiplier
• Investment multiplier is an important part of economic theories suggested by notable economist John
Maynard Keynes. According to this concept, in the event of an increase in the investment activities either
public or private which can be in the form of private consumption spending, government spending in an
economy, there is a corresponding increase in the Gross Domestic Product (GDP) of the economy by a
value more than the amount invested.
• In simple words, investment multiplier refers to the increase in the aggregate income of the economy as a
result of an increase in the investments done by the government in the form of new projects.
• The size of the investment multiplier is determined by the decisions of the households in an economy in the
areas of spending (which is known as marginal propensity to consume) or saving (known as marginal
propensity to save).
19. The multiplier can be represented by the following formula.
K = ΔY / ΔI
Where,
ΔY = Increase in GDP or National Income
ΔI = Increase in Investment
Also,
• k = 1/ 1- MPC
Where k = Investment Multiplier
MPC = Marginal Propensity to Consume
And, k = 1/ MPS
MPS = Marginal Propensity to Save
Therefore, it can be concluded that K = 1/ 1- MPC = 1/ MPS
20. It can be said that in order to find the value of the investment multiplier, either the value
of MPC or MPS should be determined or the value of the multiplier can be determined
if MPC or MPS values are provided. Let us understand the mechanism of investment
multiplier with an example.
21. • Suppose the government has made an investment of 100 crores in a road
construction project. This will lead to hiring of labourers, engineers and
suppliers of raw materials, logistics. In short such an investment will lead to
job opportunities for many people. It will result in income generation, which
will result in their tendency to consume and save.Let’s say the MPC of the
labourers is 0.5, that means that for every 1 rupee earned they spend 0.50
rupees in consumption of goods and services.
Simple Numerical
22. Similarly, we can find the value of the multiplier when MPS = 0.2
K = 1/MPS
K= 1/0.2
K= 5
Therefore, it can be seen that if the MPS value is less than the multiplier, the value increases, and when
the value of MPC is more then the investment multiplier becomes more.
The value of MPS or MPC can be used to find the total increase in income obtained from the initial
investment by using the following formula
23. K = ΔY / ΔI
• and, K = 1/MPS
Therefore, in the above example an investment of 100 crores will bring total income of
ΔY / ΔI = 1/MPS
ΔY / 100 = 1/0.2
ΔY / 100 = 5
ΔY = 500
Therefore, the total increase in income will be 500 Crores.
24. Full Employment
• Full employment refers to a situation in which all those people, who are
willing and able to work at the existing wage rate, get work without any
undue difficulty. It also refers to employment of all the other available
resources and factors of production for the production of optimum output.
25. Excess demand
EF indicates the excess demand or the inflationary gap.
Excess demand is the excess of aggregate demand over and above
its level required to maintain full employment equilibrium in the
economy. It implies two things-
1) Planned aggregate demand in the economy happens to exceed its
full employment level.
2) The level of aggregate demand surpasses the level of aggregate
supply even when the available factors are fully utilized.
26. Deficient Demand
Deficient demand refers to a situation wherein aggregate demand
in the economy falls short of aggregate supply of goods and
services at full employment.
Impacts:
1)Deficient demand leads to a fall in the income
level, output and employment.
2)A persistent fall in the deficient demand leads to a state of
depression in the economy.
27. Measures to correct excess demand and
deficient demand
• Two measures by which a central bank can check the excess demand or inflation are as
follows:
• 1) Increase in bank rate: During inflation bank rate is increased. As a follow-up action, the
commercial banks rise the market rate of interest. This reduces the demand for credit and
thus inflation can be combated.
• 2) Open market operation is the policy that focuses on increasing and decreasing the stock
of liquidity with the people, through sale and purchase of securities by the central bank.
During excess demand or inflation, the central bank tries to sell securities. The sale of
securities reduces purchasing power from the market. Consequently, aggregate demand is
decreased and excess demand or inflationary gap gets combated.