Question : If aggregate supply exceeds aggregate demand, the economy is likely to experience:
Option 1: Inflationary pressure
Option 2: Deflationary pressure
Option 3: Recessionary pressure
Option 4: Stagflation
Correct Answer: Recessionary pressure
Solution : The correct answer is (c) Recessionary pressure.
If aggregate supply (AS) exceeds aggregate demand (AD), it creates a situation of an aggregate supply-demand gap, commonly known as a recessionary or deflationary gap. In this situation, the total output produced by the economy is higher than the level of spending or demand for goods and services.
When aggregate supply exceeds aggregate demand, businesses find themselves with excess production capacity and unsold inventory. To reduce inventories, businesses may cut back on production, leading to reduced employment, lower income levels, and reduced economic activity.
The recessionary pressure arises from the fact that the economy is not fully utilizing its productive capacity, leading to a gap between what the economy can produce and what is being demanded. This can result in a downward pressure on prices as businesses may need to lower prices to stimulate demand.
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