Question : If aggregate demand exceeds aggregate supply, the economy is likely to experience:
Option 1: Inflationary pressure
Option 2: Deflationary pressure
Option 3: Recessionary pressure
Option 4: Stagflation
Correct Answer:
Inflationary pressure
Solution : The correct answer is (a) Inflationary pressure.
If aggregate demand (AD) exceeds aggregate supply (AS), it creates a situation of an aggregate demand-pull inflationary gap. This means that the total spending in the economy is higher than the economy's productive capacity to meet that demand. As a result, prices tend to rise, leading to inflationary pressure in the economy.
When aggregate demand exceeds aggregate supply, there is excessive demand for goods and services relative to the available supply. This can lead to businesses increasing prices to match the higher demand or experiencing shortages as they struggle to meet the increased demand.
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