Full employment is a situation in which all resources are fully employed and economy produces the largest output that the economy is capable of producing. When aggregate demand is more than the aggregate supply at full employment income level, there will be situation of excess demand or inflationary gap. Thus, Excess Demand = Aggregate Demand – Aggregate Supply
Following diagram shows the concept of excess demand :
In case of excess demand, output and employment cannot be increased. It only generates pressure of demand on the existing flow of goods and services in the economy. This will lead to deaccumulation of unintended inventories with businessmen. After some time, output, income and employment will be reached where AD = AS
