Excess Demand and Deficient Demand
Read the passage carefully and answer the following questions:
The equilibrium output in the economy determines the level of employment, given the quantity of other factors of production. This means that the level of output determined by equality of income with aggregate demand does not necessarily mean the level of output at which everyone is employed.
Full employment level of income is that level of income where all the factors of production are fully employed in the production process. 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 it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to a decline in prices in the long run. On the other hand, 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 the situation of excess demand. It leads to a rise in prices in the long run.
In an economy, the equilibrium level of income is attained at more than full employment level of income. This situation will be known as
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Excess demand.
Equilibrium output is fixed where aggregate demand equals output, and it need not be the full employment level, the output at which all factors of production are employed. When equilibrium output is more than the full employment level, people want to buy more than the economy can produce with all its resources at work. The situation is called excess demand, and it leads to a rise in prices in the long run.
Why the other options are incorrect
Option (1) Deficient demand. — Incorrect. Deficient demand is the opposite case: equilibrium output below the full employment level, because demand is not enough to employ all factors. It leads to a fall in prices in the long run.
Option (3) Deflationary gap. — Incorrect. A deflationary gap is the shortfall of aggregate demand below what is needed for full employment, the measure of deficient demand, not of excess demand.
Option (4) Break even level of income. — Incorrect. The break-even level of income is where consumption equals income and saving is zero; it has nothing to do with full employment.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 20-05 S1* 23-05 S2 | 30-05 S2* | – | – | – |
* A similar question.