Economics Aggregate Demand And Supply Questions Long
When aggregate supply exceeds aggregate demand, it creates a situation known as a supply surplus or an excess supply. In this scenario, there is an imbalance in the economy where producers are supplying more goods and services than consumers are demanding.
The impact on the price level and real GDP in such a situation can be analyzed as follows:
1. Price Level: With excess supply, producers are unable to sell all their goods and services at the current price level. To clear the surplus, they may reduce prices to stimulate demand. This downward pressure on prices leads to a decrease in the overall price level in the economy. Lower prices can be seen as a deflationary effect.
2. Real GDP: When aggregate supply exceeds aggregate demand, it indicates that the economy is producing more output than is being consumed. This excess supply implies that there is an accumulation of unsold goods and services, which can lead to a decrease in production levels. To adjust to the lower demand, businesses may reduce their production, leading to a decrease in real GDP. This decrease in real GDP can be seen as a contractionary effect.
Overall, when aggregate supply exceeds aggregate demand, the price level tends to decrease, and real GDP may decrease as well. This situation reflects an imbalance in the economy, where producers are unable to sell all their output, leading to a slowdown in production and a decrease in overall economic activity.