CBSE Class 12 Economics NCERT Solutions: Excess Demand and Deficient Demand

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CBSE Class 12 Economics Chapter 7, Excess Demand and Deficient Demand, explores key macroeconomic concepts. This chapter clarifies the conditions that lead to an inflationary gap (excess demand) and a deflationary gap (deficient demand), along with their economic consequences. It defines and differentiates between full employment, involuntary unemployment, underemployment equilibrium, and overfull employment equilibrium. Furthermore, the chapter discusses various measures to rectify these imbalances, including the role of monetary policy tools. These NCERT Solutions are crafted to enhance Class 12 students' understanding of aggregate demand and supply dynamics and their influence on overall economic stability, serving as a vital aid for exam preparation and revision.

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BoardCBSE
ClassClass 12
SubjectEconomics.
Session2026
LanguageEnglish
TypeNCERT Solutions
Chapter7. Excess Demand and Deficient Demand

Chapter summary

Chapter 7 of the Class 12 Economics syllabus focuses on 'Excess Demand and Deficient Demand'. The NCERT Solutions provided here clarify the meaning of excess demand, deficient demand, and the associated inflationary and deflationary gaps. It also defines key terms like full employment, involuntary unemployment, underemployment equilibrium, and overfull employment equilibrium. The solutions offer insights into the impact of these situations on production and employment, and briefly touch upon measures to manage them, aiding students in understanding macroeconomic stability.

Learning outcomes

  • Understand the concept of excess demand and its implication (inflationary gap).
  • Define deficient demand and its associated deflationary gap.
  • Explain the meaning of full employment and involuntary unemployment.
  • Differentiate between full employment, underemployment, and overfull employment equilibrium.
  • Identify the impact of deficient demand on production and employment.
  • Recognize measures to control inflationary gaps.

Topics covered

Paper topics

  • Excess Demand
  • Deficient Demand
  • Inflationary Gap
  • Deflationary Gap
  • Aggregate Demand
  • Aggregate Supply
  • Full Employment
  • Involuntary Unemployment
  • Underemployment Equilibrium
  • Overfull Employment Equilibrium
  • Monetary Policy Measures

Important topics

  • Excess Demand and Inflationary Gap
  • Deficient Demand and Deflationary Gap
  • Full Employment vs. Equilibrium
  • Underemployment Equilibrium
  • Impact on Production and Employment

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Questions and Solutions

Question 1

What is meant by excess demand in macroeconomics? [CBSE 2009]
Solution: In macroeconomics, excess demand refers to a situation where the aggregate demand in the economy is greater than the aggregate supply at the full employment level of output. This means that at the level of output where all available resources are fully utilized, the total demand for goods and services still exceeds what can be produced. This situation leads to an inflationary tendency in the economy.

Question 2

Define inflationary gap. [CBSE 2008]
Solution: An inflationary gap is the difference between the aggregate demand and the aggregate supply at the full employment level of output. Specifically, it is the amount by which aggregate demand exceeds aggregate supply when the economy is operating at full employment. This gap signifies an excess of demand over the economy's capacity to produce at full employment, leading to a rise in the general price level.

Question 3

Give the meaning of deficient demand.
Solution: Deficient demand occurs in an economy when the aggregate demand is less than the aggregate supply at the full employment level of output. This implies that the total spending in the economy is not sufficient to purchase all the goods and services that could be produced if the economy were operating at its full employment capacity. This situation can lead to a fall in output, employment, and price levels.

Question 4

Define deflationary gap. [CBSE 2008] OR Give the meaning of deflationary gap. [CBSE 2010]
Solution: A deflationary gap is the difference between the aggregate supply and the aggregate demand at the full employment level of output. It represents the amount by which aggregate demand falls short of aggregate supply when the economy is at full employment. This shortfall in demand indicates that the economy is producing less than its potential, leading to unemployment and a potential fall in prices.

Question 5

State two measures by which a central bank can attempt to reduce the inflationary gap.
Solution: A central bank can use monetary policy tools to reduce an inflationary gap. Two such measures are:
  1. Increase in Cash Reserve Ratio (CRR): By increasing the CRR, commercial banks are required to hold a larger proportion of their deposits with the central bank. This reduces the amount of funds available for lending, thereby decreasing credit availability and curbing aggregate demand.
  2. Increase in Bank Rate: The bank rate is the interest rate at which the central bank lends money to commercial banks. An increase in the bank rate makes borrowing more expensive for commercial banks, which in turn leads them to increase their lending rates. Higher borrowing costs discourage investment and consumption, thus reducing aggregate demand.

Question 6

What is the impact of increase in margin requirements?
Solution: An increase in margin requirements, which is a tool of credit control used by the central bank, discourages borrowers from obtaining loans. The margin requirement is the difference between the market value of a security and the loan amount that can be obtained against it. When this margin is increased, borrowers need to contribute a larger proportion of the purchase price of an asset from their own funds, making it more difficult and expensive to borrow. This reduction in credit availability tends to decrease aggregate demand, particularly for investment and durable goods.

Question 7

Give the meaning of full employment. [CBSE 2008]
Solution: Full employment refers to a macroeconomic situation where all individuals in the economy who are able and willing to work at the prevailing wage rate are able to find employment. It signifies that there is no involuntary unemployment. However, it does not imply zero unemployment, as frictional unemployment (due to people changing jobs) and structural unemployment (due to a mismatch between skills and job availability) can still exist.

Question 8

Give the meaning of involuntary unemployment. [CBSE 2008, 09, Sample Paper 2010]
Solution: Involuntary unemployment occurs when individuals who are willing and able to work at the existing wage rate are unable to find employment. These individuals are seeking jobs and are prepared to accept them at the current market wage, but no suitable work is available for them. This situation is against their will and indicates a lack of sufficient aggregate demand or other economic imbalances.

Question 9

Is it necessary that equality between AD and AS is established at the full employment level?
Solution: No, it is not necessary that the equality between aggregate demand (AD) and aggregate supply (AS) is always established at the full employment level. The economy can reach equilibrium (where AD = AS) at three possible levels:
  1. Full employment equilibrium: When AD = AS at the full employment level.
  2. Underemployment equilibrium: When AD = AS at a level below full employment, meaning resources are not fully utilized.
  3. Overfull employment equilibrium: When AD = AS at a level beyond full employment, which is not sustainable in the long run and indicates excess demand.
Therefore, equilibrium can occur at, below, or even theoretically beyond the full employment level.

Question 10

What is meant by full employment equilibrium?
Solution: Full employment equilibrium refers to a macroeconomic state where the aggregate demand (AD) in the economy is exactly equal to the aggregate supply (AS) at the full employment level of output. This means that the economy is operating at its maximum potential output, with all available resources being fully utilized, and everyone willing and able to work is employed.

Question 11

What is underemployment equilibrium? [CBSE 2008]
Solution: Underemployment equilibrium occurs when the economy reaches a state of equilibrium, meaning aggregate demand (AD) equals aggregate supply (AS), but this equilibrium is achieved at a level of output that is below the full employment level. In this situation, not all available resources, including labor, are being utilized. There are unemployed resources and workers who are willing to work but cannot find jobs, indicating a deficiency in aggregate demand.

Question 12

What is the meaning of over full employment equilibrium?
Solution: Overfull employment equilibrium refers to a situation where the economy achieves equilibrium (aggregate demand equals aggregate supply) at a level of output that is beyond the full employment level. This is a theoretical concept that implies aggregate demand is so high that it attempts to push output beyond the economy's sustainable capacity. In reality, this situation is characterized by excess demand and leads to inflationary pressures, as resources cannot be stretched beyond their full employment capacity.

Question 1

Name the situation under which aggregate demand exceeds aggregate supply at the full employment level.
Solution: The situation where aggregate demand exceeds aggregate supply at the full employment level is known as Excess Demand. This leads to an inflationary gap.

Question 2

Name the situation under which aggregate demand falls short of aggregate supply at full employment level.
Solution: The situation where aggregate demand falls short of aggregate supply at the full employment level is known as Deficient Demand. This leads to a deflationary gap.

Question 3

What is the impact of deficient demand on production and employment?
Solution: Deficient demand leads to a decrease in the overall spending in the economy. When aggregate demand is insufficient to purchase the goods and services that can be produced at full employment, producers tend to reduce their output. This reduction in production results in a fall in the demand for labor, leading to a decrease in employment levels and an increase in unemployment.

Common mistakes

  • Confusing inflationary gap with excess demand itself.
  • Not clearly distinguishing between full employment and equilibrium.
  • Incorrectly identifying the impact of policy measures on aggregate demand.
  • Confusing deficient demand with excess supply.

Revision tips

  • Clearly define and differentiate between excess demand and deficient demand.
  • Understand the conditions that lead to inflationary and deflationary gaps.
  • Memorize the definitions of full employment, underemployment, and overfull employment equilibrium.
  • Review the impact of policy measures on aggregate demand and supply.
  • Practice identifying the correct situation (excess demand/deficient demand) based on given conditions.

Practice MCQs

Q1. What is the situation called when aggregate demand exceeds aggregate supply at the full employment level?

Q2. When aggregate demand falls short of aggregate supply at full employment, it is known as:

Q3. What is the term for the gap between aggregate demand and aggregate supply at full employment when AD > AS?

Q4. Which of the following describes involuntary unemployment?

Q5. What is the primary impact of a decrease in aggregate demand due to deficient demand?

Frequently asked questions

What is the core concept of Chapter 7 in CBSE Class 12 Economics?

Chapter 7 focuses on understanding the macroeconomic situations of Excess Demand and Deficient Demand, the gaps they create (inflationary and deflationary), and related concepts like full employment and different types of equilibrium.

What is the difference between excess demand and inflationary gap?

Excess demand refers to the condition where aggregate demand exceeds aggregate supply at the full employment level. The inflationary gap is the measure of this excess, i.e., the amount by which aggregate demand exceeds aggregate supply at full employment.

What does full employment mean in macroeconomics?

Full employment is a situation where all individuals who are able and willing to work at the prevailing wage rate are actually employed. It does not necessarily mean zero unemployment, as frictional and structural unemployment can still exist.

Can economic equilibrium occur below the full employment level?

Yes, it is possible for the economy to reach an equilibrium where aggregate demand equals aggregate supply, but this equilibrium is below the full employment level. This situation is known as underemployment equilibrium.

How do these solutions help in exam preparation?

These solutions provide clear definitions, explanations, and answers to common questions related to excess and deficient demand, helping students build a strong conceptual foundation and revise key topics effectively for their exams.

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