(a)

“In an economy, ex-ante Aggregate Demand (AD) is more than ex-ante Aggregate Supply (AS).”

(a)

Explain the likely impact of the given situation on output, employment and income.

(b)

Define deficient demand

In an economy, if ex-ante Aggregate Demand (AD) is more than ex-ante Aggregate Supply (AS), it implies that households and firms are planning to consume more than what the firms expected them to consume. This will lead to an unintended fall in inventories. To bring back the inventory to the desired level, producers may plan to expand production. As a result, there may be an increase in the level of output, employment and income in the economy.

Deficient demand refers to a situation where Aggregate Demand (AD) falls short of Aggregate Supply (AS) corresponding to the full employment level of output.