The state of excess demand produces adverse effect on the economy’s price level, keeping the level of employment and output intact.

(a) Impact on Employment:

The level of employment in an economy is not affected due to the excess of aggregate demand over the aggregate supply. This is because; the economy is already operating at the level of full employment.

(b) Impact on Output:


At the level of full employment, supply of output is constant. So a state of excess demand does not produce adverse effect on output.

(c) Price Level:

If aggregates demand is in excess of aggregate supply, price level goes up. So a state of excess demand creates inflationary situation in a country.