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Discuss the working of the adjustment mechanism in the following situations:
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Question : 12
Total: 19
Aggregate demand is greater than Aggregate supply.
Solution:
Aggregate demand is greater than Aggregate supply. :
When AD>AS, it means that buyers are planning to buy more goods and services than what producers are planning to produce. As a result, inventories start falling and come below the desired level. To bring back the inventories at the desired level producers expand production. This raises the income level which keeps on rising till theAD and AS once again become equal.
When AD>AS, it means that buyers are planning to buy more goods and services than what producers are planning to produce. As a result, inventories start falling and come below the desired level. To bring back the inventories at the desired level producers expand production. This raises the income level which keeps on rising till the
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