In an economy Aggregate Demand is less than Aggregate Supply. Explain the changes that will take place in this economy.

Solution:

When Aggregate demands is less than aggregate supply  : It will create a situation of excess supply or deficit demand. This will lead to inventory accumulation, as due to deficit demand the producers pile up stock of unsold goods. It will force producers to cut down level of production. With fall in level of production, factors of production and employment level will reduce. The output, income and employment will continue to fall until excess supply is wiped out or AD becomes equal to AS.



 

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