question_answer

Explain all the changes that will take place in an economy when aggregate demand is not equal to aggregate supply.

Answer:

The equilibrium level may takes place before the stage of full employment and also it may take place after the stage of full employment.

In the deficient demand, the equilibrium level takes place before the full employment level. This is the case of involuntary unemployment. This signifies that deficiency of aggregate demand does not lead to the full use of given resources at the full employment level. Therefore, for reaching the stage of full employment where all the given resources are fully utilized, AD is required to be incorrected.

In the diagram (i) OZ is the full employment level and OY is the actual output level, where AD equals to AS.

In the case of excess demand, the equilibrium takes place after the stage of full employment. The level of equilibrium is higher and cannot be met by full use of resources and output does not increase, only price increases in this case.

The necessary methods should be used for reducing the level of aggregate demand, for achieving the level of full employment. In the diagram (ii) OZ is the full employment level and OY is the actual level of employments at equilibrium, where AD is equal to AS.