What is dificient demand in aggregate demand?

People, businesses, and the government together want to buy more goods and services than the economy can currently produce.

So:

$\text{Aggregate Demand}>\text{Aggregate Supply}$Aggregate Demand>Aggregate Supply

Effects of Deficit Demand

Deficit demand usually leads to:

• Rising prices (inflation)
• Shortages of goods
• Pressure on production capacity
• Increased imports in some cases

Example

Suppose an economy can produce goods worth 100 lakh at full employment, but total spending demand becomes 120 lakh.

• Supply = 100 lakh
• Demand = 120 lakh
• Excess (deficit demand) = 20 lakh

That 20 lakh is called deficit demand.

Causes of Deficit Demand

Some common causes are:

• Increase in government spending
• Excessive money supply
• Rise in consumer income
• Increase in investment spending
• Tax cuts that raise disposable income

Measures to Control It

Governments and central banks may reduce deficit demand by:

• Increasing taxes
• Reducing government expenditure
• Raising interest rates
• Controlling money supply

This concept is closely related to the macroeconomic idea of Inflation and the Aggregate Demand model.