What happens when aggregate demand exceeds aggregate supply?

When aggregate demand exceeds aggregate supply, it typically indicates that there is more demand for goods and services than what the economy can produce at current price levels. This imbalance is a key driver of economic expansion.

As demand outstrips supply, businesses may respond by increasing production to meet the higher demand, which can lead to more hiring and investment in capacity. Consequently, economic growth tends to accelerate, as increased production and employment contribute to higher overall output and potentially increases in real GDP. Additionally, as businesses ramp up their output to satisfy consumer demand, this can spur further investments and innovation, fueling ongoing economic expansion.

The other scenarios illustrate different situations: if aggregate demand were to fall short of aggregate supply, prices might decrease due to excess supply; a recession typically occurs when there is a sustained period of declining aggregate demand that leads to decreased economic activity; when demand and supply are balanced, there tends to be stability in the economy with no significant changes. Hence, the situation where aggregate demand exceeds aggregate supply is closely associated with economic expansion.