Explain excess demand and deficit demand
Answers
Excess Demand and Inflationary Gap: (a) When in an economy, aggregate demand exceeds “aggregate supply at full employment level”, the demand is said to be an excess demand. (b) Inflationary gap is the gap showing excess of current aggregate demand over 'aggregate supply at the level of full employment'.
Answer:
Excess Demand and Inflationary Gap:
(a) When in an economy, aggregate demand exceeds “aggregate supply at full employment level”, the demand is said to be an excess demand.(b) Inflationary gap is the gap showing excess of current aggregate demand over ‘aggregate supply at the level of full employment’. It is called inflationary because it leads to inflation (continuous rise in prices).
(c) A simple example will further -clarify it. Let us suppose that an imaginary economy by employing all its available resources can produce 10,000 quintals of rice. If aggregate demand of rice is say 12,000 quintals, this demand will be called an excess demand, because aggregate supply at level of full employment of resources is only 10,000 quintals and the result of the gap of 2000 quintals will be called as inflationary gap. In the above diagram Inflationary gap is AB because at Full employment Y*, Aggregate demand (BY*) is greater than Aggregate Supply(AY*).
