Equilibrium Level of Income : Full Employment, Underemployment, Over Full Employment B Com Notes | EduRev

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Is the equilibrium level of income found only at full employment level?
Ref: https://edurev.in/question/786830/Is-the-equilibrium-level-of-income-found-only-at-f

Equilibrium Level of Income : Full Employment, Underemployment, Over Full Employment!

According to the classical economists, equilibrium level of income is attained always at full employment level, i.e. there is absence of involuntary unemployment. However, as per the Keynesian theory, equilibrium level can be achieved at:

(i) Full employment level; or

(ii) Underemployment level, i.e. less than full employment level; or

(ii) Over full employment level, i.e. more than full employment level.

Equilibrium Level of Income : Full Employment, Underemployment, Over Full Employment B Com Notes | EduRev

Let us discuss the three possibilities of equilibrium level:

Full Employment Equilibrium:

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It refers to a situation when the aggregate demand is equal to the aggregate supply at full employment level.

1. In Fig. 8.3, E is the full employment equilibrium because aggregate demand ‘EQ’ is equal to full employment level of output ‘OQ’.

2. At OQ level of output, all those who are willing to work at the prevailing wage’ rate, are able to find employment, i.e. there is no involuntary unemployment.

Underemployment Equilibrium:

It refers to a situation when the aggregate demand is equal to the aggregate supply when the resources are not fully employed. It occurs prior to the full employment level.

Equilibrium Level of Income : Full Employment, Underemployment, Over Full Employment B Com Notes | EduRev

1. In Fig. 8.4, AD= AS at point ‘F which is lower than full employment level.

2. As OQ1 is less than OQ, point ‘F’ signifies the under employment equilibrium.

Over Full Employment Equilibrium:

It refers to a situation when AD is equal to AS beyond the full employment level. It occurs after the full employment level.

Equilibrium Level of Income : Full Employment, Underemployment, Over Full Employment B Com Notes | EduRev

1. In Fig. 8.5, AD, = AS at point ‘G’ which is higher than the full employment level.

2. As OQ, is more than OQ, point ‘G’ signifies the over full employment equilibrium.

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