(a) Aggregate demand is lesser than the Aggregate Supply.
● When the aggregate demand is less than the aggregate supply it means that the consumers are buying fewer goods than the goods produced by the form.
● The demand for goods and services is lesser than the supply of goods and services.
● This implies deficit demand.
● Due to this deficit demand, the producer would have a pile-up of the unsold goods in their inventory.
● The Producers would reduce production.
● This would lead to a fall in the employment of factors of production, and consequently the income and output will also decrease.
● This reduction in income and output will be sufficient so that aggregate demand is equal to aggregate supply.
● This will restore the equilibrium in the economy.
Graphically it is explained below:
● The X-axis shows aggregate supply and the Y-axis shows aggregate demand.
● AS is the aggregate supply that is at 45 degrees from the origin O.
● AD is the aggregate demand.
● Both of them intersect at point E which is the equilibrium.
● If the AD is less than the AS, as shown in the figure, it will create excess supply. TN is the excess supply.
● The producer would reduce their production, reducing the employment of factors of productions.
● This would lead to a fall in the income and output til the point that AD is equal to the AS.
● The equilibrium is restored at OY level of income/output.
(b) Ex-Ante Investments are greater than Ex-Ante Savings.
● Ex-ante investment exceeds the ex-ante savings when the injections into the circular flow of income are greater than the withdrawal of the income.
● It means that the total consumption expenditure greater than the required amount of consumption expenditure to purchase the available supply of goods and services.
● The low amount of saving means that consumers are spending more on consumption.
● There would be an unplanned reduction of inventory.
● The producers would increase the stock by increasing the usage of factors of production.
● This will lead to an increase in income and consequently greater savings.
● This would continue until saving is equal to investment.
● This would be the equilibrium.
● In the figure x-axis represent and the y-axis represents saving and investment.
● KY' represent the excess of investment over savings.
● The aggregate consumption expenditure is greater than the required amount of consumption expenditure to purchase the available supply of goods and services.
● The producers would increase their stock and increase the employment of factors of production.
● This would increase the income and thereby the savings.
● This would continue until the savings are equal to investment.
● The equilibrium is achieved at point E at Oy level of output.
Rate this question :