What is the adjustment mechanism of disequilibrium situation of AD > AS ?
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: Producers expand the production
When Aggregate Demand (AD) is greater than Aggregate Supply (AS), there is an excess demand in the economy, leading to inflationary pressure. To restore equilibrium, the following adjustment occurs:
- Producers expand production to meet the higher demand. This leads to an increase in output, helping to balance demand and supply.
- Higher demand encourages businesses to hire more workers and invest in production capacity, leading to economic growth.
- As production increases, Aggregate Supply (AS) rises, eventually matching Aggregate Demand (AD) and bringing the economy back to equilibrium.
Analysis of other options:
- Producers reduce production is incorrect because reducing production would worsen the supply-demand imbalance.
- Government imposes less tax is incorrect because tax reductions may further increase AD, worsening the disequilibrium.