If the level of effective demand is much below the level of full employment equilibrium then which situation will appear in the economy?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Underemployment equilibrium
When demand is below the full employment level, the economy can still settle at an equilibrium. Some factors are then left without work. That is underemployment equilibrium.
Option (1) Full employment equilibrium — Incorrect. Here all factors of production are fully employed. Demand must be high enough for that, and in this case it is much lower.
Option (2) Underemployment equilibrium — Correct. Equilibrium output is less than full employment output, because demand is not enough to employ all factors. Output stays at this level if left to itself, even with unemployment.
Option (3) Beyond full employment equilibrium — Incorrect. This needs equilibrium output above the full employment level, which needs demand above that level.
Option (4) Excess demand — Incorrect. Excess demand means demand is more than the output produced at full employment. Demand below that level is called deficient demand.
Note: None of the NCERT books (2026-27, 2025-26, 2023-24 or pre-rationalised) uses the term ‘underemployment equilibrium’. They describe the same situation as equilibrium output below the full employment level, and call it deficient demand.
NCERT (2026-27): “4.4 Some More Concepts … Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Recall that equilibrium attained at the point of equality of Y and AD by itself does not signify full employment of resources. Equilibrium only means that if left to itself the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output. If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It leads to rise in prices in the long run.” |