Question

“In an economy, ex-ante Aggregate Supply is less than ex-ante Aggregate Demand.”
Explain its impact on the level of output, income, and employment.

Hint:

Focus on the inflationary gap and its effects on economic variables in similar questions.

Answer 1

When ex-ante Aggregate Supply (AS) is less than ex-ante Aggregate Demand (AD), it creates an inflationary gap in the economy, resulting in: 
- Increase in Output: Firms increase production to meet the higher demand for goods and services. 
- Increase in Income: Higher production leads to increased payments to factors of production, resulting in higher income levels. 
- Increase in Employment: Firms hire more workers to increase production, thereby creating additional employment opportunities.