Step 1: Understanding the Concept:
An economy operating "below full employment equilibrium" is experiencing "Deficient Demand" or an "Underemployment Equilibrium."
This situation is characterized by involuntary unemployment, idle capacity, and low production levels because the total spending (Aggregate Demand) is insufficient to buy the full capacity output.
Step 2: Detailed Explanation:
To fix this, the government must adopt Expansionary Policies to boost Aggregate Demand (\(AD\)).
- (A) Increase taxes/Reduce expenditure: This is contractionary fiscal policy. It takes money out of the economy, reducing \(AD\) even further.
- (B) Reduce money supply: This is contractionary monetary policy. It leads to higher interest rates and lower spending.
- (C) Increase government expenditure: This is a component of Aggregate Demand (\(AD = C + I + G + X-M\)). When the government spends more on infrastructure, education, or subsidies, it creates income for people, which leads to higher consumption and moves the economy toward full employment.
- (D) Increase repo rate: This makes loans expensive, discouraging consumption and investment.
Step 3: Final Answer:
Increasing government expenditure is an expansionary fiscal measure that effectively stimulates demand and output in an underperforming economy.