Underemployment Equilibrium refers to a situation where: 1. It refers to a situation where Aggregate Demand exceeds Aggregate Supply. 2. Resources are not fully employed. 3. It is a situation where the equilibrium output is less than the full employment output. Which of the statements given above is/are correct?

The correct option is 2 and 3 only. Explanation Underemployment equilibrium is a core concept in Keynesian macroeconomics. It describes a state where the economy settles at a point where Aggregate Demand (AD) equals Aggregate Supply (AS), but this intersection occurs at a level of output lower than the economy's full employment potential. Statement-wise Analysis: - Statement 1 is Incorrect. By definition, an "equilibrium" in macroeconomics occurs only when Aggregate Demand equals Aggregate Supply ($AD = AS$). If Aggregate Demand exceeds Aggregate Supply, the economy is in a state of disequilibrium (excess demand), which typically leads to inflation or inventory depletion rather than a stable equilibrium. Underemployment equilibrium is characterized by deficient demand relative to full capacity, not excess demand. - Statement 2 is Correct. In an underemployment equilibrium, the economy reaches stability without utilizing all available resources. This implies the existence of involuntary unemployment of labor and idle capital capacity, meaning resources are not fully employed. - Statement 3 is Correct. Full employment output ($Y_f$) is the level of production achieved when all resources are fully utilized. Underemployment equilibrium occurs when the actual equilibrium level of output ($Y_e$) is strictly less than the full employment output ($Y_e < Y_f$). Key Takeaway: Underemployment equilibrium is a stable state where $AD = AS$, but the economy operates below its potential capacity ($Y_e < Y_f$), resulting in involuntary unemployment due to deficient effective demand.

NCERT Class 12 Economics — Chapter 6: Determination of Income and Employment

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Underemployment Equilibrium refers to a situation where:

It refers to a situation where Aggregate Demand exceeds Aggregate Supply.
Resources are not fully employed.
It is a situation where the equilibrium output is less than the full employment output.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1, 2 and 3
B2 only
C1 and 2 only
D2 and 3 only

Did you get this right?

Solution

The correct option is 2 and 3 only.

Explanation

Underemployment equilibrium is a core concept in Keynesian macroeconomics. It describes a state where the economy settles at a point where Aggregate Demand (AD) equals Aggregate Supply (AS), but this intersection occurs at a level of output lower than the economy's full employment potential.

Statement-wise Analysis:

Statement 1 is Incorrect. By definition, an "equilibrium" in macroeconomics occurs only when Aggregate Demand equals Aggregate Supply ($AD = AS$). If Aggregate Demand exceeds Aggregate Supply, the economy is in a state of disequilibrium (excess demand), which typically leads to inflation or inventory depletion rather than a stable equilibrium. Underemployment equilibrium is characterized by deficient demand relative to full capacity, not excess demand.
Statement 2 is Correct. In an underemployment equilibrium, the economy reaches stability without utilizing all available resources. This implies the existence of involuntary unemployment of labor and idle capital capacity, meaning resources are not fully employed.
Statement 3 is Correct. Full employment output ($Y_f$) is the level of production achieved when all resources are fully utilized. Underemployment equilibrium occurs when the actual equilibrium level of output ($Y_e$) is strictly less than the full employment output ($Y_e < Y_f$).

Key Takeaway:
Underemployment equilibrium is a stable state where $AD = AS$, but the economy operates below its potential capacity ($Y_e < Y_f$), resulting in involuntary unemployment due to deficient effective demand.

Your note

More from Chapter 6: Determination of Income and Employment

With reference to the government sector in the determination of income, consider the following statements: 1. Government expenditure adds to the aggregate demand similar to investment and consumption. 2. Taxes imposed by the government increase the disposable income of households. 3. In the absence of indirect taxes, the GDP is identically equal to the National Income. Which of the statements given above is/are correct?

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Match List I with List II and select the correct answer using the code given below: List I | List II A. Excess Demand | 1. Amplifies changes in autonomous expenditure B. Deficient Demand | 2. Leads to a decline in prices in the long run C. Multiplier | 3. Signals that supply exceeds demand D. Inventory Accumulation | 4. Leads to a rise in prices in the long run

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Consider the following statements regarding Savings in an economy: 1. Savings is defined as the portion of income that is used for tax payments. 2. The Marginal Propensity to Save (MPS) is the change in savings per unit change in income. 3. If the Marginal Propensity to Consume (MPC) is 1, the Marginal Propensity to Save (MPS) will be 0. Which of the statements given above is/are correct?

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What does "Negative Inventory Investment" signify in an economy? 1. A rise in the stock of finished goods. 2. A depletion of existing stock to meet excess demand. 3. A situation where planned sales are less than actual sales. Which of the statements given above is/are correct?

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With reference to the consumption function in an economy, consider the following statements: 1. Autonomous consumption is the consumption expenditure that occurs only when income is positive. 2. Induced consumption is the portion of consumption that varies directly with the level of income. 3. The marginal propensity to consume determines the rate at which induced consumption changes as income changes. Which of the statements given above is/are correct?

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The correct option is 2 and 3 only.

Explanation

Statement-wise Analysis:

Statement 1 is Incorrect. By definition, an "equilibrium" in macroeconomics occurs only when Aggregate Demand equals Aggregate Supply ($AD = AS$). If Aggregate Demand exceeds Aggregate Supply, the economy is in a state of disequilibrium (excess demand), which typically leads to inflation or inventory depletion rather than a stable equilibrium. Underemployment equilibrium is characterized by deficient demand relative to full capacity, not excess demand.
Statement 2 is Correct. In an underemployment equilibrium, the economy reaches stability without utilizing all available resources. This implies the existence of involuntary unemployment of labor and idle capital capacity, meaning resources are not fully employed.
Statement 3 is Correct. Full employment output ($Y_f$) is the level of production achieved when all resources are fully utilized. Underemployment equilibrium occurs when the actual equilibrium level of output ($Y_e$) is strictly less than the full employment output ($Y_e < Y_f$).