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Question
What is excess demand? Illustrate it graphically.
Diagram
Short Answer
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Solution
‘Excess demand’ refers to the situation where aggregate expenditure is more than the aggregate output at the full employment level. In the diagram, OYf (or BYf) represents the level of output when the economy is fully employed.
According to the AE curve, the desired level of aggregate expenditure at full employment income is AYf. Therefore, the excess demand is the gap between AYf and BYf, represented by AB.
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