Question

The equilibrium below full employment level is termed as _____________.

• A. underemployment equilibrium
• B. over employment equilibrium
• C. aggregate disequilibrium
• D. none of the above

Answer 1

Answer: (A)

underemployment equilibrium

When the aggregate spending is not sufficient to produce an adequate level of output which requires full employment of available resources then it means aggregate demand is less than aggregate supply, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output which reduces the employment in the economy and results in AD=AS. This equilibrium point is below the full employment level of equilibrium which is called underemployment equilibrium.