Question

Discuss, in brief, the state of full employment equilibrium with the help of a diagram.

Answer 1

The full employment level of equilibrium is reached only when aggregate demand (AD) equals aggregate supply (AS) because at this level there is no tendency for income and output to change.
In the diagram the equilibrium is at K where AD intersects 45 line. At this point, AD = AS.
When AD is more than AS (say, at point R), then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach K, where AD = AS.
When AD is less than AS (say, at point S), then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till AD becomes equal to AS.
So, full employment level of equilibrium will take place only at point K, when AD = AS where all the capable and willing people get job at the existing wage rate.