How does Excess demand cause demand-pull inflation?
When aggregate demand for goods and services exceeds aggregate supply of output which is produced by fully employing the given resources of an economy, excess demand is said to occur.
When aggregate demand for goods and services exceeds aggregate supply of output which is produced by fully employing the given resources of an economy, excess demand is said to occur.
Deficient demand and excess demand can be distinguished from each other in the following manner. Deficient demand is a situation, which occurs due to excess of aggregate supply of output over the aggregate demand for output at the level of full employment.
The state of excess demand produces adverse effect on the economy’s price level, keeping the level of employment and output intact.