Question

Define excess demand.

Hint:

Excess demand leads to inflation, resource strain, and economic disequilibrium—usually corrected through fiscal or monetary tightening.

Answer 1

Excess demand refers to a situation in an economy where aggregate demand exceeds aggregate supply at the full employment level of output. In other words, people are demanding more goods and services than the economy can produce at its current capacity.
Inflationary Pressure: Excess demand pushes up the general price level, resulting in inflation.
Overutilization of Resources: It leads to overemployment and excessive pressure on existing resources.
Macroeconomic Imbalance: The imbalance between demand and supply disturbs the economic equilibrium and causes instability.
Excess demand typically occurs when planned expenditure (consumption + investment + government spending) is higher than the economy’s full employment output.