Macro

Income & Employment

Medium

Comprehension:

OUTPUT AND EMPLOYMENT

The equilibrium output in the economy also determines the level of employment, given the quantities of other factors of production (think of a production function at aggregate level). This means that the level of output determined by the equality of Y with AD does not necessarily mean the level of output at which everyone is employed. Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Recall that equilibrium attained at the point of equality of Y(Income) and AD by itself does not signify full employment of resources. Equilibrium only means that, if left to itself, the level of income in the economy will not change even when there is unemployment in the economy. 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 a 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 will lead to a rise in prices in the long run.

Level of employment is determined by which of the following?

Output Eqilibrium.

Factor of Production

Capital Employed.

Availability of Raw Material.

✅ Correct Option: 1

Option 1 -> In equilibrium, aggregate demand equals aggregate supply, determining the output level which directly influences employment.

Option 2 -> Factors of production are inputs used in production but don't determine employment levels independently.

Option 3 -> Capital is one factor of production but alone doesn't determine overall employment in the economy.

Option 4 -> Raw materials are necessary for production but are not the primary determinant of employment levels.

Hence, Output Equilibrium -> According to Keynesian economics, the level of employment in an economy is determined by the equilibrium level of output (where aggregate demand equals aggregate supply). When output is at equilibrium, it determines how much production is needed, which in turn determines how much labor (employment) is required. The economy's employment level adjusts based on the output that firms need to produce to meet aggregate demand. This is why output equilibrium is the key determinant of employment levels in an economy. -> correct

Question 41

Excess demand is the situation where ......

Question 42

If output equilibrium is less than the full employment level, then this condition is known as:

Question 44

The level of output is determined by the .....

Question 45

Full employment level is the level where ........

Level of employment is determined by which of the following?

Solution

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