Answer to Question #135549 in Macroeconomics for tshwanelo

Question

is the equilibrium level of income also the full employment level of income

Answer 1

$$Solution$$

Classical economists believe that the balance of income is often reached at full employment, which ensures that there is no involuntary unemployment. However, the equilibrium stage can be reached, as per Keynesian theory when there is,

• Full employment level; or
• Underemployment level, i.e. less than full employment level; or
• Over full employment level, i.e. more than full employment level.

Full employment level-It refers to a situation when the aggregate demand is equal to the aggregate supply at full employment level. The figure below explains this scenario.

$E$ is the full employment equilibrium because aggregate demand $EQ$ is equal to full employment level of output $OQ$. Also,  for those who want to work at the prevalent wage rate will find jobs at the OQ level of production, that is, there is no involuntary unemployment.

Underemployment Income-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. This can also be illustrated as below.

$AD_1=AS$ at point ‘F which is lower than full employment level, also As $OQ_1$  is less than $OQ$ , point ‘F’ signifies the under employment equilibrium.

Over full employment level-It refers to a situation when AD is equal to AS beyond the full employment level. It occurs after the full employment level. This can be explained as below

$AD=AS$ at point ‘G’ which is higher than the full employment level, and also as $OQ$ , is more than $OQ$ , point ‘G’ signifies the over full employment equilibrium.