Write the meaning and causes of excess demand with diagram
Answers
Answer:
Excess demand refers to the situation when aggregate demand (AD) is more than the aggregate supply (AS) corresponding to full employment level of output in the economy. It is the excess of anticipated expenditure over the value of full employment output. ADVERTISEMENTS: Excess demand gives rise to an inflationary gap.
Answer.
Excess demand gives rise to an inflationary gap. Inflationary gap refers to the gap by which actual aggregate demand exceeds the aggregate demand required to establish full employment equilibrium. The concepts of excess demand and inflationary gap are illustrated with the help of Fig. 9.1.
In the diagram, income, output and employment are measured on the X-axis and aggregate demand is measured on the Y-axis. Aggregate demand (AD) and aggregate supply (AS) curves intersect at point E, which indicates the full employment equilibrium.Due to increase in investment expenditure (∆I), aggregate demand rises from AD to AD1. It denotes the situation of excess demand and the gap between them, i.e., EF is termed as inflationary gap. It must be noted that the situation of excess demand generates inflationary pressure in the economy.
