Question

Discuss how effective demand can be restored if ex-ante Aggregate Demand (AD) is more than ex-ante Aggregate Supply (AS).

Answer 1

If ex-ante Aggregate Demand is greater than ex-ante Aggregate Supply, it means that consumers intend to purchase more goods and services than producers plan to produce. As a result, producers’ inventories will begin to decrease. In response, producers will increase their level of production. This will continue until the level of income rises to a point where Aggregate Demand becomes equal to Aggregate Supply.