What changes take place in an economy when aggregate demand and aggregate supply is not equal?
The equilibrium level of national income is determined when aggregate demand is equal to aggregate supply.
At equilibrium level of income,
Planned spending (AD) = Planned output (AS)
When AD > AS
When AD is more than AS, it means demand for goods and services in the economy is more than their flow.
In other words, it means buyers are buying faster than sellers are expecting, as a result as a result inventory would fall below the desired level.
To increase inventory upto desired level, firms would plan to increase the production (output). It increases employment level, output level and level of income.
This process will continue till AD and AS become equal to each other.
When AD < AS
When AD is less than AS, it means demand for goods and services in the economy is less than their flow.
In other words, it means consumers are not consuming as much the firms producing, as a result some goods remain unsold in the firms and undesired inventory increases in the firms.
To clear this undesired inventory, firms would plan to reduce the production (output) and lay off workers. It decreases employment level, output level and level of income.
This process will continue till AD and AS become equal to each other.
At equilibrium level of income,
Planned spending (AD) = Planned output (AS)
When AD > AS
When AD is more than AS, it means demand for goods and services in the economy is more than their flow.
In other words, it means buyers are buying faster than sellers are expecting, as a result as a result inventory would fall below the desired level.
To increase inventory upto desired level, firms would plan to increase the production (output). It increases employment level, output level and level of income.
This process will continue till AD and AS become equal to each other.
When AD < AS
When AD is less than AS, it means demand for goods and services in the economy is less than their flow.
In other words, it means consumers are not consuming as much the firms producing, as a result some goods remain unsold in the firms and undesired inventory increases in the firms.
To clear this undesired inventory, firms would plan to reduce the production (output) and lay off workers. It decreases employment level, output level and level of income.
This process will continue till AD and AS become equal to each other.