Identify the situation in which the equilibrium level of output is less than the full employment level of output?

Deficient demand.

The correct answer is Option (4) → Deficient demand.

Deficient demand refers to a situation where aggregate demand is less than what is required to maintain full employment in the economy. As a result:

• The equilibrium level of output falls below the full employment level.

• It leads to underutilization of resources.

" 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."