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Effect on Output

Because demand is less, there will be excess inventory (stock) with firms

Hence, they will produce less (as there is already stock with them)

 

Effect on Employment

It causes involuntary employment

People want to work and earn and are capable but do not find job

 

Effect on General price Level

It leads to decreases in prices of commodity

This is because of deflationary gap

(as price of commodity is more than supply)

Because demand is less, price of commodity falls

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Impact of Deficit Demand Effect on Output Effect on Employment Effect on General price Level Less Production (Due to less demand, there is excess inventory with firms Causes Involuntary unemployment Decrease in Prices (Due to deflationary gap)

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CA Maninder Singh is a Chartered Accountant for the past 13 years and a teacher from the past 17 years. He teaches Science, Economics, Accounting and English at Teachoo