Explain the changes that take place when Aggregate Demand and Aggregate Supply are not equal.

When AD < AS inventories accumulate. As a result, producers reduce production, AS falls. This process continue till AD = AS.

If AD > AS, inventories fall. To make up for this producer’s increase production. As increase. This process continues till AD = AS.

Detailed Answer:

(i) When AD > AS, it means that the buyers are planning to buy more goods and services than the producers are planning to produce (i.e., supply). In this situation, inventories start falling and come below the desired level, the producers expand production. This raises the income level, which keeps on rising till AD and AS are equal again.

(ii) When AD < AS, it means that the buyers are planning to buy less than what the producers are planning to reproduce. As a result, inventories start rising and move above the desired level. So the producers cut back on production and lay off workers. This reduces the income level i.e., AS. This downward trend continues till AD and AS once again become equal.