Based on the following diagram answer the question :
The gap E'F in the diagram indicate ______________.
Answer & explanation
Correct answer: option 3
The correct answer is option (3) : Excess demand
The gap E'F represents a situation of excess demand in the market.
When autonomous investment increases, the $AD^1$ line shifts in parallel upwards and assumes the position $AD^2$ . The value of aggregate demand at output Y1 is Y1F, which is greater than the value of output OY1 = Y1* E' by an amount E'F. E'F measures the amount of excess demand that emerges in the economy as a result of the increase in autonomous expenditure.