Question

In an economy aggregate demand is greater than aggregate supply. Explain the changes that will take place in this economy.

Answer 1

When Aggregate demand is more than Aggregate supply , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach a level where AD = AS.