Option 1 -> Excess demand occurs when AD exceeds AS, not when AD falls.
Option 2 -> Deficient supply is unrelated; the issue is with falling demand, not supply shortage.
Option 3 -> While eventual adjustment may occur, the immediate impact is deficient demand, not automatic equilibrium.
Option 4 -> When AD falls below full employment level, demand becomes insufficient to purchase all output at full employment, creating deficient demand.
Hence, deficient demand in the economy -> When aggregate demand falls after reaching full employment equilibrium, the economy experiences deficient demand (also called deflationary gap). At this point, AD < AS at full employment level, meaning consumers and firms want to buy less than what the economy can produce. This leads to unsold inventories, falling prices, declining production, and rising unemployment. The economy moves below its potential output until demand recovers or policy interventions restore equilibrium. -> correct