Question

The impact of excess demand corresponding to the full employment level of output on the economy will be ______.

Options

• increase in income, output and employment

• increase in general price level

• both increase in income, output and employment and increase in general price level

• None of these

Answer 1

The impact of excess demand corresponding to the full employment level of output on the economy will be increase in general price level.

Explanation:

At the full employment level, all productive resources are already completely utilised, making it impossible to expand real output, income, or employment further. Consequently, the excess demand forces buyers to compete for a fixed supply of goods, which bids up prices and exclusively causes an increase in the general price level (inflationary gap).