Question

“In an economy ex-ante Aggregate Demand is less than ex-ante Aggregate Supply.”

Explain its impact on the level of output, income and employment. 

Answer 1

1. If ex-ante aggregate demand is smaller than ex-ante aggregate supply (AD<AS), it signifies that households spend less on goods and services than the economy's flow of goods and services.
   1. Effect on output: Goods will remain unsold with the producers, and in order to clear the stocks, the producers will seek to reduce production. As a result, the economy's output will fall.
   2. Effect on Employment: The plan to lower output will result in a decrease in the country's employment level. Producers will begin to lay off workers.
   3. Effect on Income: Employee retrenchment or layoffs will result in a drop in the country's income level. The country's national income and per capita income will fall.