Step 1: Picture the deflationary gap on an AD-AS diagram:
At full-employment output, if the actual AD curve lies below the required AD curve (the one that would just match full-employment AS), the vertical gap between them is the deflationary gap — the economy is producing more than it's spending.
Step 2: Trace the recessionary chain reaction:
Weak demand → unsold inventories build up (unplanned inventory rise) → firms cut future production plans → income and employment fall → this further weakens demand (a downward multiplier spiral) — which is exactly why timely intervention matters.
Step 3: Show how each policy lever pushes AD back up:
Cutting CRR/SLR and the repo rate frees up bank funds and cheapens borrowing, pushing investment demand up; RBI open-market bond purchases inject cash directly into the system. On the fiscal side, extra government spending directly adds to AD, while tax cuts raise disposable income that households spend, also raising AD. Export promotion adds foreign demand for domestic goods, and import restriction keeps demand at home rather than leaking abroad.
Step 4: Tie it back together:
All these measures work by directly or indirectly pushing the actual AD curve back up toward the full-employment AD level, closing the deflationary gap.
Final Answer:
Deficient demand (a deflationary gap where AD < full-employment AS) is corrected using expansionary monetary policy, expansionary fiscal policy, and measures that raise net exports.