“In an economy, Aggregate Demand (AD) is more than Aggregate Supply (AS).
“Elaborate the possible impacts of the same, on the level of output, income and employment.
Ans. When Aggregate Demand (AD) exceeds Aggregate Supply (AS), it indicates a situation of demand-pull inflation and can have the following impacts on the level of output, income, and employment:
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Output and Income Increase: The excess demand in the economy leads firms to increase production to meet the higher level of demand. As a result, the level of output and income in the economy increases as businesses expand production to meet consumer demand.
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Employment Increases: To meet the higher level of demand, firms often need to hire more workers and increase labor utilization. This leads to an increase in employment levels as businesses expand their workforce to meet the higher production requirements.
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Price Levels Rise: As demand exceeds supply, firms may raise prices to manage the excess demand and maintain profitability. This can lead to inflationary pressures in the economy as prices rise due to increased demand relative to supply.
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Potential Supply Constraints: If the excess demand persists over the long term, it may lead to supply bottlenecks and constraints as firms struggle to keep up with demand. This could potentially limit the ability of the economy to sustainably increase output and may lead to inflationary pressures in the long run.
