At the present level of employment in a hypothetical economy, the aggregate demand is falling short of aggregate supply. What will be the likely change in the level of national income of this economy?

National income is likely to fall.

The correct answer is Option (2) → National income is likely to fall.

When aggregate demand (AD) falls short of aggregate supply (AS), it means that producers are unable to sell all their output.
As a result:

• Unintended accumulation of inventories takes place.

• Producers reduce production to avoid excess stock.

• This leads to a fall in output, employment, and income in the economy.

Hence, when AD < AS, the national income is likely to fall until equilibrium is restored where AD equals AS.