Question

Excess demand is a situation in which:

Options

• Government expenditure equals government revenue

• Aggregate supply exceeds full employment output

• Aggregate demand is less than aggregate supply at the full employment level of output

• Aggregate demand is more than aggregate supply at the full employment level of output

Answer 1

Excess demand arises when aggregate demand is more than aggregate supply at the full employment level of output. It is corrected through fiscal policy by reducing government expenditure or increasing taxes.