Equilibrium and Level of Employment
Read the passage carefully and answer the following questions:
The equilibrium output in economy also determines level of employment, given quantities of other factors of production. This means that level of output determined by equality of Y with AD does not necessarily mean level of output at which everyone is employed. The full-employment level of income is that level of income where all factors of production are fully employed in production process. The equilibrium attained at point of equality of Y and AD by itself, does not signify full-employment of resources. Equilibrium only means that if left to itself, level of income in economy will not change even when there is unemployment in economy. The equilibrium level of output may be more or less than full-employment level of output. If it is less than full-employment of output, it is due to fact that demand is not enough to employ all factors of production; this leads to decline in prices in long run. On other hand, if equilibrium level of output is more than full-employment level, it is due to fact that demand is more than level of output produced at full-employment level; this leads to rise in prices in long run. The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy.
The situation in which the equilibrium level of output is less than full employment of output, is called as:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Deficient Demand
Equilibrium only means that output equals aggregate demand; it does not mean that every factor of production is employed. If people demand less than the economy can produce with all its factors at work, firms produce only that much, and output settles below the full employment level. Because demand is not enough to employ all the factors, this is the situation of deficient demand.
Left to itself the economy can stay there with unemployment; in the long run deficient demand leads to a decline in prices.
Why the other options are incorrect
Option (1) Excess Demand — Incorrect. Excess demand is the opposite case: equilibrium output is more than the full employment level, because demand is more than the output that can be produced at full employment, and it leads to a rise in prices.
Option (3) Ex ante demand — Incorrect. Ex ante demand is the planned demand of buyers. It is a measure of demand, not the name of a shortfall below full employment.
Option (4) Ex post Demand — Incorrect. Ex post means the actual value recorded after the event. Like ex ante demand, it names a measure, not the situation in the question.
Note 1: This passage is taken almost word for word from the Determination of Income and Employment chapter of the NCERT book. Read the chapter line by line; this passage comes straight off its pages.
Note 2: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 21-05 S2 23-05 S2* 24-05 S1* | 13-05 S1* 22-05 S1* 27-05 S2* 28-05 S2* | – | – | 15-07 S2* |
* A similar question.
NCERT (2025-26): “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.…” |