Chapter 4 Part 2 - Income Determination and Multiplier

Economics Class 12
Macroeconomics

According to Keynesian theory

Equilibrium Level of Income is achieved at

Full Employment Level

Under Employment Level

Over Full Employment level

It means that Aggregate demand can be equal to Aggregate Supply at all 3 levels

Resources are fully employed

Resources are not fully employed

Resources are employed more than full employment level

Lets learn about it one by one

## Full Employment Level

It refers to situation where

Aggregate Demand = Aggregate Supply

when Resources are fully employed

Graph Representation

On X axis, we show Income or Output

On Y Axis, we show Demand

It can be seen that

AD is Positively Sloping Starting from Point M

AS is also Positively Sloping but starts from Point 0.

It makes an angle of 45 Degree with Origin

Point where AD and AS Curve intersect is equilibrium Point

#### Note

We join E and x axis at Point Q

At this point, OQ is Equilibrium level of Output

At OQ level, it is assumed that all those who are willing to work are able to get work and find employment (there is full employment)

## Under Employment Level

It refers to situation where

Aggregate Demand = Aggregate Supply

when Resources are not fully employed

Graph Representation

On X axis, we show Income or Output

On Y Axis, we show Demand

We know that in case of Full Employment

AD and AS Curves normally intersect at Point E

But In case of Underemployment

Due to this ,AD1 and AS Curve met at Point F

Hence, F is equilibrium Point

We can say that in case of Underemployment, equilibrium Level shifts leftwards

#### Note

We join E and x axis at Point Q1

At this point,OQ1 is Equilibrium level of Output

Since OQ1 is less than OQ, it denotes resources are under employed

## Over Employment Level

It refers to situation where

Aggregate Demand = Aggregate Supply

when Resources are beyond full employment level

Graph Representation

On X axis, we show Income or Output

On Y Axis, we show Demand

We know that in case of Full Employment

AD and AS Curves normally intersect at Point E

But In case of Overemployment

Due to this ,AD1 and AS Curve met at Point G

Hence, G is equilibrium Point

We can say that in case of Overemployment, equilibrium Level shifts Rightwards

#### Note

If we join E and x axis at Point Q1

At this point,OQ1 should be Equilibrium level of Output

Hence, Output should increase beyond full employment level

This is not possible as resources are already fully employed and there is no idle capacity

This equilibrium Point is achieved by firms by increasing price of goods, not their quantities

Hence, there is no real increase in Output in this case

### NCERT Questions

No questions in this part

### Other Books

#### Question 1

What is meant by Full employment equilibrium?

#### Question 2

What is meant by underemployment equilibrium?

#### Question 3

What is meant by over employment equilibrium?

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