(a) "In an economy, ex-ante Aggregate Demand (AD) is more than ex-ante Aggregate Supply (AS)." Explain the likely impact of the given situation on output, employment and income. (b) Define deficient demand

Question

Accepted Answer

(a) **When ex-ante AD > ex-ante AS:**
- This indicates **excess demand** in the economy
- Planned expenditure exceeds planned output at full employment
- **Impact on output:** Since economy is at full employment, output cannot increase further
- **Impact on employment:** Employment is already at maximum, cannot increase
- **Impact on income:** The excess demand leads to rise in general price level (inflation)
- Firms may try to increase production temporarily but eventually prices rise

(b) **Deficient Demand** is the opposite situation when aggregate demand is less than aggregate supply at full employment level. It leads to fall in output, income and employment, causing unemployment. The gap between actual AD and required AD is called the deflationary gap.