(a) Justify the following statement : “Full employment is an essential condition to be fulfilled under Keynesi

Question 31 of 104

Q. (a) Justify the following statement : “Full employment is an essential condition to be fulfilled under Keynesian Economics Principles.”

(OR)

(b) “Involuntary Unemployment is a situation where an able bodied person unwilling to work does not get work at the prevailing wage rate.” Do you agree with the given statement ? Elucidate briefly.

Ladakh CbseCBSE Class XII Board 2022Subjective· 2mImportance★★★★★

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Part (a)Concept understanding — Aggregate Demand Equilibrium

Aggregate Demand Equilibrium: The Economy's Balancing Act

Think of a seesaw. On one side sits everything people, firms, and the government want to buy. On the other side sits everything firms produce. When the seesaw is perfectly level — when total spending exactly matches total output — the economy is in equilibrium. That's the core idea.

But why should you care? Because when the seesaw tilts, real things happen. If spending exceeds output, prices rise (inflation). If output exceeds spending, factories shut down and people lose jobs. Equilibrium is the sweet spot where neither happens.

The Precise Meaning

In macroeconomics, Aggregate Demand (AD) is the total planned spending on final goods and services in an economy during a given period. Aggregate Supply (AS) is the total output firms plan to produce.

Equilibrium occurs where:

AD = AS

At this point, what buyers intend to spend exactly equals what sellers intend to produce. No unwanted inventories pile up, and no shortages force prices up. The economy is "at rest."

Y = C + I + G + (X - M)

This is the AD identity from your NCERT textbook. It tells you that total spending in the economy comes from four sources: households, firms, government, and foreigners (net of what we buy from them).

How Equilibrium Actually Works

Imagine a simple economy with only households and firms. Households earn income $Y$ from firms. They spend part of it on consumption $C$ and save the rest $S$ . Firms produce output and also invest $I$ (buying machines, building factories).

Equilibrium condition becomes:

Y = C + I

But households don't spend all their income. They save. So $C = Y - S$ . Substituting:

Y = (Y - S) + I

Which simplifies to:

S = I

Important

In equilibrium, planned savings must equal planned investment. This is the Keynesian cross condition. If people save more than firms invest, total spending falls short of output — inventories pile up, firms cut production, and income falls until savings and investment match again.

The 45° Line Diagram (Describe It)

Draw a graph with Aggregate Demand (AD) on the vertical axis and National Income (Y) on the horizontal axis.

Draw a 45° line from the origin. Every point on this line represents $AD = Y$ — the equilibrium condition.
Draw the AD curve (which is $C + I + G + (X-M)$ ). It slopes upward because as income rises, consumption rises.
Where the AD curve crosses the 45° line — that's the equilibrium point. …

Part (b)Concept understanding — Aggregate Demand Equilibrium

Aggregate Demand Equilibrium: The Economy's Balancing Act

The Precise Meaning

Equilibrium occurs where:

AD = AS

At this point, what buyers intend to spend exactly equals what sellers intend to produce. No unwanted inventories pile up, and no shortages force prices up. The economy is "at rest."

Y = C + I + G + (X - M)

How Equilibrium Actually Works

Equilibrium condition becomes:

Y = C + I

But households don't spend all their income. They save. So $C = Y - S$ . Substituting:

Y = (Y - S) + I

Which simplifies to:

S = I

Important

The 45° Line Diagram (Describe It)

Draw a graph with Aggregate Demand (AD) on the vertical axis and National Income (Y) on the horizontal axis.

Draw a 45° line from the origin. Every point on this line represents $AD = Y$ — the equilibrium condition.
Draw the AD curve (which is $C + I + G + (X-M)$ ). It slopes upward because as income rises, consumption rises.
Where the AD curve crosses the 45° line — that's the equilibrium point. …

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Part (a): The statement is NOT justified — full employment is a classical assumption; in Keynesian economics it is a goal, not a precondition.

Part (b): I do NOT agree — involuntary unemployment means a WILLING, able worker cannot get work at the prevailing wage, not an "unwilling" person.

Part (a)

The statement claims full employment is an essential condition of Keynesian principles. This reverses the actual position and therefore cannot be justified.

Classical economics assumed the economy always tends to full employment through flexible wages and prices (Say's Law: "supply creates its own demand").
Keynes rejected this. Writing during the Great Depression — when millions willing to work were jobless — he showed that output and employment are determined by aggregate demand. If aggregate demand is deficient, the economy reaches an under-employment equilibrium, i.e. an equilibrium with involuntary unemployment. …

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Q.(a) Justify the following statement : “Full employment is an essential condition to be fulfilled under Keynesian Economics Principles.”

Part (a)

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