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Determination of Income and Employment — Economics STD 12 Humanities & Commerce — Question

Rajasthan BoardEnglish MediumSTD 12 Humanities & CommerceEconomicsDetermination of Income and Employment2 Marks
Question
In an economy, Aggregate Demand is greater than Aggregate Supply. Explain the changes that will take place in this economy.
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Answer

When AD > AS in an economy, it creates an inflationary gap. It creates inflationary pressure in the economy and the price level tends to rise and the wage rate also goes up. Inflationary gap encourages the producers to increase the output to meet the desired level of demand. It leads to gradual increase in income and output and ultimately, the Aggregate Supply also rises to the point where, AS = AD.

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