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 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 ......
Solution
Option 1 -> Deficient supply refers to insufficient supply of goods/services, not the issue described here.
Option 2 -> Excess demand means demand exceeds supply, leading to inflation, which is opposite to the scenario.
Option 3 -> Deficient demand occurs when aggregate demand is insufficient to employ all factors of production at full employment level.
Option 4 -> Deficient factors of production suggests scarcity of resources, but the issue is lack of demand, not resources.
Hence, Option 3: Deficient demand -> When equilibrium output falls short of full employment output because aggregate demand is inadequate to utilize all available factors of production (labor, capital, etc.), it creates a deflationary gap. This Keynesian concept explains unemployment and underutilization of resources in an economy. The gap between actual output and potential output represents the deficiency in demand that prevents the economy from reaching full employment -> correct
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