Question : If aggregate supply exceeds aggregate demand, it is likely to result in:
Option 1: Recessionary gap
Option 2: Inflationary gap
Option 3: Equilibrium output
Option 4: Economic growth
Correct Answer:
Recessionary gap
Solution : The correct answer is (a) Recessionary gap.
A recessionary gap occurs when the equilibrium level of output in an economy is below the potential level of output. When aggregate supply exceeds aggregate demand, it means that businesses are producing more goods and services than what is being demanded by consumers, investors, and the government.
A recessionary gap is characterized by high unemployment, reduced consumer spending, and sluggish economic growth. It is typically associated with a downward pressure on prices and wages as businesses try to adjust to the lower demand.
To close a recessionary gap and return the economy to its potential level of output, policies such as expansionary fiscal or monetary measures can be implemented to stimulate aggregate demand and encourage increased production and employment.
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