Explain the changes that take place when Aggregate Demand and Aggregate Supply are not equal.
Explain the changes that take place when Aggregate Demand and Aggregate Supply are not equal.
(i) When AD> AS, it means that the buyers are planning to buy more goods and services than the producers are planning to produce or supply. In this situation, inventories start falling and come below the desired level, the producers expand their production. This raises the income level, which keeps rising till AD and AS are equal again.
(ii) When AD<AS, it means that the buyers are planning to buy fewer goods and services than the producers are planning to produce or supply. In this situation, inventories start rising and move above the desired level. So, the producers curtail the production and retrench the workers and unemployment prevails. This reduces the income level, which keeps on falling till AD and AS become equal again.
(i) When AD> AS, it means that the buyers are planning to buy more goods and services than the producers are planning to produce or supply. In this situation, inventories start falling and come below the desired level, the producers expand their production. This raises the income level, which keeps rising till AD and AS are equal again.
(ii) When AD<AS, it means that the buyers are planning to buy fewer goods and services than the producers are planning to produce or supply. In this situation, inventories start rising and move above the desired level. So, the producers curtail the production and retrench the workers and unemployment prevails. This reduces the income level, which keeps on falling till AD and AS become equal again.
