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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

In an economy, if aggregate demand (AD) is greater than aggregate supply (AS), it implies that buyers now plan to purchase more goods and services than producers are planning to supply. Producers keep ready stock in the form of 'inventories'. When AD > AS, this implies that buyers are buying faster than what the sellers had expected. Thus the inventories start falling and fall below the desired level. So to bring back the inventories at their desired level, producers produce more, which raises the income level, which keeps on going up, till ADAS, once again.

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