Option 1 -> This describes deficient demand or recessionary gap, not excess demand.
Option 2 -> This represents equilibrium at full employment where AD = AS.
Option 3 -> This correctly defines excess demand where aggregate demand exceeds aggregate supply at full employment.
Option 4 -> This only indicates growth in output, not excess demand.
Hence, Option 3: Demand is more than output level at full employment level -> Excess demand (also called inflationary gap) occurs when aggregate demand exceeds the economy's productive capacity at full employment. Since the economy is already operating at full employment, it cannot increase output further to meet the additional demand. This leads to upward pressure on prices, causing inflation. The excess demand creates a gap between what people want to buy and what can actually be produced, resulting in demand-pull inflation. -> correct