Question

If the equilibrium level of output is less than the full employment of output, this situation is called the situation of

• A. Deficient Demand.
• B. Aggregate Demand.
• C. Excess Demand.
• D. Effective Demand.

Hint:

Equilibrium Output \(<\) Full Employment Output \(\implies\) Deficient Demand (Deflationary Gap).
Equilibrium Output \(>\) Full Employment Output \(\implies\) Excess Demand (Inflationary Gap).

Answer 1

The Correct Option is A

Concept:
In macroeconomics, equilibrium output does not necessarily coincide with the full-employment capacity of the economy.
Depending on the strength of aggregate spending, equilibrium can establish above, at, or below full employment.

Step 1: Defining Full Employment vs. Underemployment Equilibrium:
Full employment output represents the maximum sustainable output an economy can produce when all willing and able resources are employed.
If aggregate demand is insufficient to purchase the full-employment output:
- The economy settles at an equilibrium output level below the full-employment output.
- Firms face involuntary inventory accumulation and scale back production, leading to involuntary unemployment.
- This state of insufficient spending is termed Deficient Demand, which gives rise to a deflationary gap.

Step 2: Evaluating Distractor Options:
- Excess Demand occurs when aggregate demand exceeds full-employment output, generating an inflationary gap.
- Effective demand refers simply to the point where aggregate demand equals aggregate supply.
Final Answer:
A situation where equilibrium output falls short of full employment output is called Deficient Demand. Option (A) is correct.