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Question
"In an economy ex-ante Aggregate Demand is more than ex-ante Aggregate Supply."
Explain its impact on the level of output, income and employment.
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Solution
If ex-ante aggregate demand exceeds ex-ante aggregate supply (AD > AS) in an economy, it signifies that households are spending more than the flow of goods and services in the economy.
- Effect on output: Producers will expand production to fulfill the rising demand in the economy. As a result, the economy's output will rise.
- Effect on Employment: Producers will use more resources (labor) to increase production. As a result, the economy's employment will grow.
- Effect on Income: More job chances will be created when the employment level rises. It will raise the level of income in the economy.
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