Two chains of reasoning each have one step missing:
Chain 1: Equilibrium output is less than the full employment output → P → the situation is called deficient demand → prices decline in the long run.
Chain 2: Equilibrium output is more than the full employment output → Q → the situation is called excess demand → prices rise in the long run.
Which option gives the missing steps P and Q correctly?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → P: demand is not enough to employ all factors of production; Q: demand is more than the output produced at the full employment level
Output stays below full employment when demand is not enough to employ all factors. It goes above when demand is more than the output at full employment.
Option (1) P: the multiplier becomes less than one; Q: the multiplier becomes greater than one — Incorrect. The multiplier 1 / (1 − c) does not decide whether output is above or below full employment.
Option (2) P: unintended inventories run down; Q: unintended inventories pile up in the warehouses — Incorrect. Inventories change only while output is out of equilibrium. Both chains start from an equilibrium output.
Option (3) P: demand is more than the output produced at the full employment level; Q: demand is not enough to employ all factors of production — Incorrect. The two causes are the wrong way round.
Option (4) P: demand is not enough to employ all factors of production; Q: demand is more than the output produced at the full employment level — Correct. Not enough demand gives deficient demand; too much demand gives excess demand.
NCERT (2026-27): “4.4 Some More Concepts … 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.” |