Distinguish between "Excess Demand" and "Deficient Demand".

Excess Demand-Excess demand refers to a situation when Aggregate Demand (AD) is in excess of Aggregate Supply (AS) corresponding to full employment in the economy. It causes Inflationary Gap in the economy. Price level tends to rise without any rise in the level of income or employment.

Deficient Demand- A Situation in an economy, when the Aggregate Demand is less than the Aggregate Supply, corresponding to full employment level, is termed as deficient demand.

Role of Open Market Operations in Correcting Excess Demand:

Open market operations refers to sale and purchase of government securities by the Central Bank in open market. In case of excess demand, the Central Bank sells the securities to public.

It reduces the supply of money and also reduces the credit creation power of Commercial Banks. In this way, the Aggregate Demand of economy comes down and the problem of excess demand is corrected.