Excess demand is not a desired situation because it does not lead to any increase in level of aggregate supply as the economy is already working at full employment level. Excess demand has the following effect on output, employment and general price level.
(i) Effect on Output : Excess demand does not affect the level of output because economy is already working at full employment level and there is no ideal capacity in the economy.
(ii) Effect on Employment : There will be no change in the level of employment as the economy is already operating at full employment equilibrium and there is no involuntary unemployment.
(iii) Effect on General Price Level : Excess demand leads to rise in the general price level (known as inflation) as aggregate demand is more than aggregate supply.