“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.
Explain its impact on the level of output, income, and employment.
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Solution and Explanation
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.
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