Question

Which of the following is a reason of appearing surplus demand?

• A. Increase in public expenditure
• B. Increase in money supply
• C. Fall in taxes
• D. All of these

Hint:

Expansionary fiscal (more spending, less taxes) and monetary (more money supply) policies all boost aggregate demand, which can lead to surplus demand.

Answer 1

The Correct Option is D

Surplus demand (or excess demand) occurs when aggregate demand in the economy exceeds aggregate supply at the full employment level. All the options listed are causes of an increase in aggregate demand:

(A) Increase in public expenditure: This is a direct injection of spending into the economy by the government.
(B) Increase in money supply: This makes credit cheaper and more available, encouraging consumption and investment spending.
(C) Fall in taxes: This increases the disposable income of households and profits of firms, leading to higher consumption and investment.
Since all three lead to higher aggregate demand, they can all cause surplus demand.