<u>Deflation is the likely result of excess aggregate supply over aggregate demand. </u>
Further explanation:
In general, the economy is in equilibrium when the equality between aggregate demand and aggregate supply is achieved. When the equality between aggregate demand and aggregate supply is not there, the economy is said to be in disequilibrium which results in either inflation or deflation. When the aggregate supply is higher than the aggregate demand that implies there is competition among producers to sell their goods. As a result, producers will lower their prices in order to sell their goods and services. This turns into a situation of deflation in the economy.
Justification for the correct and incorrect answer:
A) Deflation: This option is correct.
The deflation refers to a fall in the general price level in an economy. In a situation when the aggregate supply exceeds the aggregate demand in the economy, the producers will compete with each other to sell their goods and services. This will result in falling prices by the producers in order to induce consumers to buy goods and services. As a result, deflation occurs in the economy.
B) Depression: This option is incorrect.
The depression is a state of sustained and severe downfall in the economic activity in an economy. This is caused by a very low level of aggregate demand that lowers the output produced in an economy to a great extent. A higher aggregate supply relative to the aggregate demand tells nothing about the level of the economic activity or output in the economy.
C) Inflation: This option is incorrect.
The inflationary pressure in an economy is a result of excess aggregate demand over aggregate supply. When the aggregate demand is higher than the aggregate supply in an economy, consumers compete with each other to acquire limited goods and services. As a result, they are willing to pay a higher price for goods and services which leads to inflation in the economy.
D) Recession: This option is incorrect.
The recession is a situation that arises in an economy when there is a general downfall in its economic activity. A higher aggregate supply over aggregate demand in an economy does not depict anything regarding a downfall in economic activity or output produced in the economy.
Therefore, the likely result of excess aggregate supply over aggregate demand in an economy is deflation.
Learn more:
1. Learn more about supply
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2. Learn more about inflation and economy
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3. Learn more about inflation
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Answer details:
Grade: Senior School
Subject: Economics
Chapter: Aggregate demand and aggregate supply
Keywords: in general, when aggregate supply, exceeds, aggregate demand, what, is likely, result, depression, recession, inflation, deflation, an economy in disequilibrium, aggregate demand and aggregate supply, result of unequal aggregate demand and supply, likely effect on the economy.
