Option 1 -> When demand exceeds output at full employment, it creates inflationary pressure.
Option 2 -> This refers to when demand is less than full employment output, causing unemployment.
Option 3 -> Not applicable as the issue relates to demand levels, not output being excessive.
Option 4 -> Incorrect as the problem is with excess demand, not insufficient output.
Hence, Excess demand -> When the equilibrium level of output exceeds the full employment level because aggregate demand is greater than the output at full employment, this situation is called excess demand or inflationary gap. This occurs when total spending in the economy exceeds the economy's capacity to produce goods and services at full employment, leading to upward pressure on prices and inflation. It represents a situation where "too much money is chasing too few goods." -> correct