Answer to Question #135447 in Macroeconomics for Kulani

Question

Is the equilibrium level of income also the full employment level of income? Explain your answer

Answer 1

The equilibrium level of income is not necessary the full employment level of income.

Using the AD/AS model, the equilibrium national income level is determined where AD interacts with AS. When the aggregate demand curve interacts with the long run aggregate supply curve, the actual GDP is equal potential GDP and equilibrium national income is the full employment equilibrium national income. However, when aggregate demand did not interact with the long run aggregate supply, then the short run equilibrium national income is either higher than full employment equilibrium, when actual GDP exceeds potential GDP, or is lower that full employment equilibrium, when actual GDP falls short of potential GDP.

Thus, equilibrium national income maybe equal to the full employment equilibrium national income. However, it is not necessarily always equal to full employment equilibrium: it can be higher that or can be lower full employment equilibrium resulting in inflation and unemployment respectively.