Read the passage carefully and answer the questions based on the passage:

Determination of Income and Employment

When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex ante consumption, ex ante investment, government spending etc. The rate of increase in ex ante consumption due to a unit increment in income is called marginal propensity to consume. For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle. An increase in autonomous spending causes aggregate output of final goods to increase by a larger amount through the multiplier process. Full employment level of income is that level of income where all the factors of production are fully employed in the production process. The equilibrium attained at the point of equality of Y and AD by itself does not signify full employment of resources. Equilibrium only means that if left to itself the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output.

If the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called as..............

Excess demand

The correct answer is Option (1) → Excess demand 

1. Full employment level of income: "that level of income where all the factors of production are fully employed in the production process."

2. The Situation: "If the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level."

The situation described is one where the aggregate demand exceeds the output level that the economy can produce when all resources are fully employed. This is a classic definition of Excess demand.