Discuss how, effective demand can be restored, if ex-ante AggregateDemand (AD) is more than ex-ante Aggregate Supply (AS)

When ex-ante Aggregate Demand (AD) is more than ex-ante Aggregate Supply (AS), it means that the demand for goods and services in an economy is more than what is being supplied. This situation can lead to inflation and shortages of goods. Here are some steps that can be taken to restore effective demand:

1. Increase Aggregate Supply: The most direct way to restore effective demand is to increase the aggregate supply. This can be done by increasing production capacity, improving technology, or increasing the labor force. This will help to meet the high demand and bring the economy back to equilibrium.

2. Control Aggregate Demand: Another way to restore effective demand is to control the aggregate demand. This can be done by implementing policies that reduce consumption and investment. For example, the government can increase taxes or interest rates to discourage spending and investment.

3. Improve Market Efficiency: Improving the efficiency of the market can also help to restore effective demand. This can be done by reducing barriers to entry, promoting competition, and improving information availability. This will help to ensure that goods and services are allocated in the most efficient way.

4. Government Intervention: In some cases, government intervention may be necessary to restore effective demand. This can be done through fiscal and monetary policies. For example, the government can increase government spending to stimulate the economy or decrease interest rates to encourage investment.

5. Increase Exports: Increasing exports can also help to restore effective demand. This can be done by improving the competitiveness of domestic industries or by devaluing the currency to make exports cheaper.

By implementing these steps, it is possible to restore effective demand when ex-ante Aggregate Demand is more than ex-ante Aggregate Supply.