Question

‘Although with given aggregate demand and supply curves there will normally be only one position of equilibrium, this need not be at the level of full employment.’ Discuss the statement.

Answer 1

• Normally, aggregate demand (AD) and aggregate supply (AS) curves intersect at a single point which represents the equilibrium in the economy.
• This equilibrium determines the level of employment and output at that point.
• However, this equilibrium does not have to be at full employment; it can be at less than full employment (under-employment equilibrium) if aggregate demand is insufficient.
• When AD is below the level needed for full employment, producers do not fully utilize resources, causing unemployment.
• To reach full employment equilibrium, aggregate demand needs to increase and intersect aggregate supply at the full employment level.
• Beyond full employment, if aggregate demand increases further, it creates excess demand, causing inflation rather than more employment, because resources are fully used.
• Thus, equilibrium guarantees only equality of AD and AS at a certain output, but not necessarily full employment.