Explain the meaning of under-employment equilibrium. Explain two measures by which full-employment equilibrium can be reached.
Explain the meaning of under-employment equilibrium. Explain two measures by which full-employment equilibrium can be reached.
Under-employment equilibrium is a situation where the equilibrium level of income is established before the full-employment level. In other words, at the level of equilibrium, aggregate demand is less than aggregate supply. Therefore, for obtaining the situation of full-employment level, the level of aggregate demand should be increased. There are a number of measures which can be used for increasing the level of aggregate demand.
(i) Bank rate is the rate of interest which the Central Bank charges from commercial banks for giving them credit. However, the relationship between rate of interest and demand for credit is inverse. Thus, in case of deficient demand, bank rate should be lowered. This will lead to a fall in the rate of interest, leading to an increase in the demand for credit. This will raise aggregate demand.
(ii) Open market operations refer to the sale and purchase of securities by the Central Bank. In a situation of deficient demand, the Central Bank buys securities in the open market and makes payment to the sellers. The money flows out of the Central Bank and ultimately reaches the commercial banks as deposits. This raises the lending capacity of the banks and the people can borrow more. This will raise aggregate demand.
Under-employment equilibrium is a situation where the equilibrium level of income is established before the full-employment level. In other words, at the level of equilibrium, aggregate demand is less than aggregate supply. Therefore, for obtaining the situation of full-employment level, the level of aggregate demand should be increased. There are a number of measures which can be used for increasing the level of aggregate demand.
(i) Bank rate is the rate of interest which the Central Bank charges from commercial banks for giving them credit. However, the relationship between rate of interest and demand for credit is inverse. Thus, in case of deficient demand, bank rate should be lowered. This will lead to a fall in the rate of interest, leading to an increase in the demand for credit. This will raise aggregate demand.
(ii) Open market operations refer to the sale and purchase of securities by the Central Bank. In a situation of deficient demand, the Central Bank buys securities in the open market and makes payment to the sellers. The money flows out of the Central Bank and ultimately reaches the commercial banks as deposits. This raises the lending capacity of the banks and the people can borrow more. This will raise aggregate demand.
