If aggregate demand falls after reaching full employment equilibrium, what will be the likely impact on the economy?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → deficient demand in the economy.
When aggregate demand falls after reaching full employment equilibrium, total spending in the economy becomes insufficient to purchase the full employment level of output. As a result, producers reduce production, leading to unemployment and underutilization of resources. This situation is known as deficient demand, where aggregate demand < aggregate supply at the full employment level.