Brief notes on three major Impacts of excess demand

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.