OUTPUT AND EMPLOYMENT
The equilibrium output in the economy also determines the level of employment, given the quantities of other factors of production (think of a production function at aggregate level). This means that the level of output determined by the equality of Y with AD does not necessarily mean the level of output at which everyone is employed.
Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Recall that equilibrium attained at the point of equality of Y(Income) and AD by itself does not signify full employment of resources. Equilibrium only means that, if left to itself, the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output.
If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to a decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It will lead to a rise in prices in the long run.
Q) Level of employment is determined by which of the following?
Correct Answer :
Output Eqilibrium.
Solution :
The correct option is: Output Eqilibrium.
Step-by-Step Explanation:
1. Understanding the Relationship between Output and Employment:
According to the provided text, the level of employment in an economy is directly linked to its level of output, given the quantities of other factors of production (as described by the aggregate production function). Specifically, the text states: "The equilibrium output in the economy also determines the level of employment..."
2. Analyzing the Passage:
The passage explains that the equilibrium level of output is determined by the equality of total income/output (Y) and Aggregate Demand (AD). This equilibrium output subsequently dictates the level of employment in the economy. This means that if the economy reaches an equilibrium where output is low, employment will also be low, regardless of whether all resources are fully employed.
3. Conclusion:
Since the passage explicitly states that the equilibrium output determines the level of employment, the level of employment is determined by "Output Equilibrium" (spelled in the options as "Output Eqilibrium.").
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