Question

Does a situation of increasing aggregate demand (AD) imply a situation of excess demand?

Answer 1

A situation of increasing aggregate demand (AD) does not always imply excess demand. Excess demand occurs only when aggregate demand exceeds aggregate supply at the full employment level. Before full employment is reached, increases in AD are generally matched by increases in aggregate supply (AS), so no excess demand arises. Excess demand and its inflationary effects appear only after the economy hits full employment, where output cannot increase further .