Question

For the purpose of restoring equilibrium in an economy currently operating at over full employment, what should be done?

• A. Taxes must be reduced
• B. Repo rate must be reduced
• C. Government expenditure must be reduced
• D. Securities must be purchased by the central bank

Answer 1

Answer: (C)

Government expenditure must be reduced

Answer 2

In an economy operating at over full employment equilibrium, inflationary pressures build up due to excessive demand. To reduce demand and restore equilibrium, the government can reduce its expenditure, which would lead to a contraction in aggregate demand and help control inflation. Reducing taxes or lowering interest rates would only increase demand further, exacerbating the problem.