Q.Read the following statements : Assertion (A) and Reason (R). Choose the correct alternative given below. Assertion (A) : Excess demand does not lead to any increase in the level of real output. Reason (R) : Excess demand creates a gap between actual demand and desired demand corresponding to full employment level. Alternatives :

The Assertion says that excess demand does not lead to any increase in the level of real output. This is true. In macroeconomics, excess demand arises when aggregate demand exceeds aggregate supply at the full employment level. Since the economy is already at full employment, all resources are fully utilised, so real output cannot increase further. Any additional demand only pulls up the general price level, not real output.

The Reason states that excess demand creates a gap between actual demand and desired demand corresponding to full employment level. This is also true. The "gap" here is the inflationary gap — the amount by which actual aggregate demand exceeds the aggregate demand needed to maintain full employment output. However, this Reason does not explain why real output does not increase. The correct explanation is that at full employment, the economy cannot produce more real goods and service …

To understand this question, first picture what "excess demand" means in macroeconomics. Excess demand is a situation where aggregate demand in the economy is greater than aggregate supply at the full employment level of output. In other words, people want to buy more goods and services than the economy is capable of producing when all its resources — labour, capital, land — are fully employed.

The key insight is this: once an economy has reached full employment, it cannot increase its real output any further in the short run. Every worker who wants a job already has one; every factory is running at capacity. So if demand keeps rising beyond that point, producers cannot hire more workers or run machines faster to make more physical goods. What happens instead is that prices rise. The result is purely inflationary — a rise in the general price level — with no increase in the quantity of goods and services produced. That is exactly what Assertion (A) states: "Excess demand does not lead to any increase in the level of real output." This is true, and it is the basis of the NCERT/CBSE Class-12 Macroeconomics treatment of the inflationary gap.

Now look at Reason (R): "Excess demand creates a gap between actual demand and desired demand corresponding to full employment level." This is a description of the inflationary gap — the excess of actual aggregate demand over the level of aggregate demand needed to sustain full-employment output. Read this way, the statement is a true description: excess demand does create such a gap at the full-employment level.