<u>In general, when aggregate demand exceeds aggregate supply, lower employment is the most likely result. </u>
Further explanation:
The economy is in the equilibrium state when aggregate demand matches the aggregate supply. The inequality between the two puts the economy into dis-equilibrium state. When aggregate demand exceeds the aggregate supply, inflation is the outcome and as a result, producers start producing more. Firms raise the production levels and for that hire more labor which lowers down unemployment in the economy.
Justification for the correct and incorrect answer:
A) Lower tax rates: This option is incorrect.
Lower tax rates are not the likely result of excess aggregate demand. Excess aggregate demand in the economy could be a result of low tax rates policy of the government but lower tax rates could not be a resultant outcome of excess aggregate demand.
B) Higher tax rates: This option is incorrect.
When aggregate demand exceeds aggregate supply, producers’ response with large production of output and high level of employment is more likely to occur than the government response with high tax rates. The government policy of high tax rates in the phase of excess demand could not occur as the government aims to maximize the GDP and output.
C) Lower unemployment:This option is correct.
In the phase of more aggregate demand over aggregate supply, firms respond immediately by increasing the level of production of output. As a result, firms start hiring more labors which lowers the overall level of unemployment in the economy.
D) Higher unemployment: This option is incorrect.
Higher unemployment corresponds to the low level of employment. In the phase of excess aggregate demand, when firms start employing more labor into the production process, employment rises. As a result, the economy experiences low level of unemployment.
Therefore, when aggregate demand is higher than aggregate supply, lower unemployment is the most likely result.
Learn more:
1. Learn more about unemployment due to lack of skills.
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2. Learn more about GDP and taxes
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3. Learn more about demand supply
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Answer details:
Grade: Senior school
Subject: Economics
Chapter: Aggregate demand-Aggregate supply
Keywords: in general, when, aggregate demand, exceeds aggregate supply, most likely, to result, lower tax rates, higher tax rates, lower unemployment, higher unemployment, equilibrium state when aggregate demand matches the aggregate supply.
