Chapter 7: Excess Demand and Deficient Demand Class 12 Economics NCERT Solutions

Learn the causes and impacts of excess and deficient demand with Class 12 Economics Chapter 7 NCERT Solutions. Download free PDFs for fast revision. Scroll down to access all detailed solutions easily.

What You Will Learn in Chapter 7 – Excess Demand and Deficient Demand

This chapter helps students identify the conditions that lead to an imbalance in aggregate demand and aggregate supply, known as excess or deficient demand. It explains how these imbalances affect output, prices, employment, and the overall stability of the economy.

Key Topics Covered:

Excess Demand (Inflationary Gap)

Definition: Occurs when aggregate demand > aggregate supply at full employment.
Features:
- No rise in output (beyond full employment).
- Results in demand-pull inflation.
Causes:
- Increase in consumption or investment.
- Rise in government spending.
- Increase in exports.
- Reduction in taxes.
Impacts:
- Inflation.
- Rise in input prices.
- Adverse balance of payments.
- Overheating of the economy.

Deficient Demand (Deflationary Gap)

Definition: Occurs when aggregate demand < aggregate supply at full employment.
Features:
- Fall in output and employment.
- Underutilization of resources.
Causes:
- Decrease in consumption or investment.
- Cut in government spending.
- Increase in taxes.
- Fall in exports.
Impacts:
- Unemployment.
- Low consumer confidence.
- Price fall or deflation.

Inflationary Gap vs Deflationary Gap

Basis	Inflationary Gap (Excess Demand)	Deflationary Gap (Deficient Demand)
Condition	AD > AS	AD < AS
Output Level	Beyond full employment	Below full employment
Main Problem	Inflation	Unemployment
Government Policy	Contractionary	Expansionary
Effect on Economy	Overheating	Slowdown

Government Policies to Correct Demand Gaps

Fiscal Policy Measures

To Correct Excess Demand:

Increase in taxes.
Reduction in government expenditure.
Creation of budget surplus.

To Correct Deficient Demand:

Reduction in taxes.
Increase in government expenditure.
Creation of budget deficit.

Monetary Policy Measures

To Control Excess Demand:

Increase
in repo rate and CRR.
Selling of government securities.
Reduction in credit creation by banks.

To Control Deficient Demand:

Decrease in repo rate and CRR.
Purchase of government securities.
Expansion of credit facilities.

Diagrams for Explanation

Inflationary Gap: AD curve intersects AS beyond full employment level.
Deflationary Gap: AD curve intersects AS below full employment level.

These diagrams help visualize the gaps in the economy and are often asked in board exams.

NCERT Solutions for Chapter 7 – Exercise Questions

Intext Questions:

Definition-based and conceptual understanding of inflationary and deflationary gaps.
Explanation of how aggregate demand shifts create these gaps.

Exercise Questions (Q1–Q10):

Step-by-step answers on:
- Causes of excess and deficient demand.
- Their economic effects.
- Role of monetary and fiscal policy.
- Conceptual questions with diagram-based explanations.
- Practical examples of inflationary and deflationary conditions.

Download Chapter 7 Solutions PDF – Excess Demand and Deficient Demand

Download our free, detailed PDF containing:

Complete solutions to all intext and exercise questions.
Labeled AD-AS diagrams.
Summarized notes and key points for revision.

Highlights of Our NCERT Solutions:

Well-explained policy tools to manage excess and deficient demand.
Diagram-based answers to enhance understanding.
Real-life examples of inflationary and deflationary trends.
Board-focused questions and answers aligned with CBSE pattern.

Recommended Preparation Tips:

Practice AD-AS diagrams showing both gaps.
Memorize fiscal and monetary tools used in both scenarios.
Focus on understanding the economic consequences of each type of demand gap.
Revise conditions of equilibrium and disequilibrium.
Attempt short and long-answer questions for both inflationary and deflationary gaps.

Additional Study Resources:

Chapter 7 Notes – Summary of Excess and Deficient Demand.
Flashcards: Terms like AD, AS, full employment, inflationary gap.
Exemplar Problems for deeper understanding.
MCQs and previous year questions for practice.

Mastering Chapter 7 – Excess Demand and Deficient Demand

Understanding this chapter is crucial for students who want to analyze how an economy reacts to demand fluctuations. From identifying gaps to applying corrective policies, mastering these concepts builds a strong foundation for macroeconomic policy-making.

Whether it\’s preparing for board exams or competitive tests, this chapter gives you essential insights into how economies are stabilized through strategic interventions.

NCERT Solutions for Class 12 Economics Chapter 7 – Excess Demand and Deficient Demand

NCERT Textbook Questions Solved – Class 12 Macro Economics

Very Short Answer Type Questions

Q1: What is meant by excess demand? Answer: Excess demand occurs when aggregate demand exceeds aggregate supply at the full employment level.
Q2: Define inflationary gap. Answer: Inflationary gap is the excess of aggregate demand over aggregate supply at full employment level.
Q3: Define deficient demand. Answer: Deficient demand arises when aggregate demand falls short of aggregate supply at full employment.
Q4: Define deflationary gap. Answer: Deflationary gap is the shortfall of aggregate demand from aggregate supply at full employment level.
Q5: State two central bank measures to reduce inflationary gap. Answer: (i) Increase in CRR; (ii) Increase in margin requirements.
Q6: Impact of increasing margin requirements? Answer: It discourages borrowing, reducing aggregate demand.
Q7: Meaning of full employment? Answer: Situation where all willing and able persons are employed at prevailing wage rates.
Q8: Meaning of involuntary unemployment? Answer: Willing workers unable to find employment at existing wage rates.
Q9: Is AD = AS always at full employment? Answer: No, it can occur at under-employment or over full employment levels too.
Q10: Meaning of full employment equilibrium? Answer: AD = AS at full employment level.
Q11: Meaning of underemployment equilibrium? Answer: AD = AS at less than full employment level.
Q12: Meaning of over full employment equilibrium? Answer: AD = AS beyond full employment level, causing inflation.

II. Multiple Choice Questions (1 Mark)

Question	Answer
AD > AS at full employment?	(a) Excess demand
AD < AS at full employment?	(b) Excess supply
Impact of deficient demand?	(b) Decrease
Fiscal policy for deficient demand?	(d) All of the above
Fiscal policy for excess demand?	(d) All of the above
Monetary policy for deficient demand?	(d) All of the above
Monetary policy for excess demand?	(d) All of the above

III. Short Answer Type Questions (3–4 Marks)

Causes of Excess Demand: High consumption, rise in investment, increased government spending, export boom, higher money supply.
Effects of Excess Demand: Price level rises, no change in output, no change in employment.
Causes of Deficient Demand: Low consumption, reduced investment, fall in government expenditure, decrease in exports, fall in money supply.
Effects of Deficient Demand: Price falls, employment falls, output declines.
Role of Government Expenditure and Open Market Operation:
– Government reduces spending to control excess demand.
– Central Bank sells securities to mop up excess liquidity.
Difference between Full Employment and Underemployment Equilibrium:
– Full Employment: All resources utilized.
– Underemployment: Resources underutilized.
Meaning of Margin Requirement:
– Central Bank reduces margin requirement to boost borrowing during deflationary periods.

IV. True or False (with reasons)

Increase bank rate to control deflation ➔ False
Purchase of securities during depression ➔ True
Availability of credit helps during deflation ➔ True
Fiscal policy affects only producing sector ➔ False
Equilibrium below full employment affects output ➔ True

V. Long Answer Type Questions (6 Marks)

Underemployment Equilibrium: Equilibrium occurs before full employment. To achieve full employment, additional investment is needed.
(Diagram: AD curve below AS at full employment)
Difference between Inflationary and Deflationary Gap: – Inflationary: AD > AS at full employment.
– Deflationary: AD < AS at full employment.
(Diagram showing deflationary gap)
Role of Repo Rate in Inflationary Gap: Higher repo rate discourages borrowing and curbs inflation.
Role of Open Market Operation in Deflationary Gap: Buying securities boosts liquidity and demand.
Role of Bank Rate in Deficient Demand: Lowering the bank rate makes loans cheaper, increasing spending.
Role of Reverse Repo Rate in Excess Demand: Higher reverse repo rate incentivizes banks to deposit funds with RBI, reducing lending.

VI. Higher Order Thinking Skills (HOTS)

Equilibrium not always at full employment: Equilibrium can occur at underemployment or over-employment levels too.

VII. Value Based Questions

Controlling money supply to curb inflation:
Raise CRR, SLR, or Bank Rate.
Fiscal measures to control inflation:
Increase taxes and reduce government spending.
Is AD = AS equilibrium always good?:
Not necessarily, it may be underemployment equilibrium.
Increase money supply and depression:
Lower Bank Rate and SLR even when money supply rises, boosting activity.

VIII. Application Based Questions

Handling depression: Timely government and monetary actions can limit its impact.
Impact of lower interest rates on small investors: Hurts income security but boosts overall economic growth.