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Discuss the adjustment mechanism in the following situations :
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Question : 18
Total: 24
Aggregate demand is lesser than Aggregate Supply.
Solution:
At the income level above the equilibrium, the planned aggregate demand (AD) is less than the aggregate supply. (AS). This implies that there is an excess availability of goods and services in an economy. This surplus in goods is added to the inventory stock of goods. The rise in the inventories above a desired level reduces the production which leads to the decrease in income and employment in the economy. This process continues till AD equal to AS .
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