At the present level of employment in a hypothetical economy, the aggregate demand is falling short of aggregate supply. What will be the likely change in the level of national income of this economy?

Option 1 -> When AD < AS, there is excess supply, not excess demand, so national income cannot rise.

Option 2 -> When aggregate demand falls short of aggregate supply, producers face unsold inventory, leading them to reduce production, employment, and output, causing national income to fall.

Option 3 -> Equilibrium occurs when AD = AS. Since AD < AS, the economy is in disequilibrium, not equilibrium.

Option 4 -> There is no mechanism for income to initially rise when production exceeds demand; it will only fall.

Hence, Option 2: National income is likely to fall -> When aggregate demand is less than aggregate supply (AD < AS), it indicates that the total production in the economy exceeds what consumers and businesses want to purchase. This leads to unplanned inventory accumulation. Producers respond by cutting back on production levels, which reduces employment and factor incomes. As production decreases, national income falls until a new equilibrium is reached where AD equals AS. This process continues until the disequilibrium is corrected -> correct