i) Excess demand refers to a situation where the aggregate demand for output is more than the full employment level of output.
ii) It is not a favourable situation.
iii) The economy is already in the situation of full equilibrium and full employment so it does not lead to an increase in the level of aggregate supply. The effect of excess demand is explained below:
a) excess demand does not have any effect on the level of output because the economy has already attained the full employment level.
b) excess demand does not lead to any change in the level of employment as the economy has already reached the full employment level. There is also no involuntary employment.
c) excess demand leads to an increase in the general price level called inflation. This is because the aggregate demand is more than the aggregate supply.
(a) Ex-Ante Savings: The savings which a firm or an entrepreneur expects to make in the economy during a period is called the ex Ante saving or planned saving. It also refers to the savings made by households at different levels of income in an economy.
(b) Full Employment: Full employment is the situation when all the workers who are willing and able to work at the current wage rate are employed. The supply of labour is equal to the demand of labour at the given wage rate.
(c) Autonomous Consumption: When the income of a consumer is zero, his consumption is not zero. This is because there are certain basic needs which have to be fulfilled even at 0 levels of income. To fulfill these basic needs, the consumer uses his past savings. The consumption at this zero level of income is called autonomous consumption. This is symbolically donated as capital C.
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