In an economy, Aggregate Demand is greater than
Aggregate Supply. Explain the changes that will take place in this economy.
When AD > AS in an economy, it creates an inflationary gap. It creates inflationary pressure in the economy and the price level tends to rise and the wage rate also goes up. Inflationary gap encourages the producers to increase the output to meet the desired level of demand. It leads to gradual increase in income and output and ultimately, the Aggregate Supply also rises to the point where, AS = AD.