Question

Immediately after the AD curve shifts upward from AD₁ to AD₂, the situation at the old equilibrium point E₁ is characterised by:

Options

• AD₂ lying below AD₁, indicating deficient demand

• AD₂ lying above the 45° line, creating excess demand

• AD₂ coinciding exactly with the 45° line

• AD₂ lying below the 45° line, creating excess supply

Answer 1

At the old equilibrium income level, the new aggregate demand curve AD₂ lies above the 45° line, meaning planned spending exceeds current output. This gap constitutes excess demand, which sets the adjustment process in motion.