Q.Why did Keynes argue that equilibrium can occur below the full-employment level? Explain.

Because equilibrium is set by where aggregate demand meets aggregate supply — not by the availability of resources — it can settle wherever effective demand happens to be, including below full employment. …

The classical claim rejected. The classical economists believed equilibrium always occurs at full employment because Say's Law guarantees sufficient demand. Keynes disagreed.

Keynes's reasoning. The equilibrium level of income and employment is determined where aggregate demand equals aggregate supply (the point of effective demand), i.e. where $Y = C + I$. This point depends entirely on the strength of aggregate demand, not on how many resources are available.

If planned aggregate demand is weak — for instance, because households save a large part of their income and planned investment is insufficient to offset that saving — then the AD curve intersects the AS curve at a level of output below what full employment would produce. At that equilibrium there is no tendency for output to change (demand equals supply), yet many willing workers cannot find jobs. This is an under-employment equilibrium with involuntary unemployment.

Because wages are sticky and there is no automatic mechanism raising demand, the economy can remain stuck at this level. The remedy, Keynes argued, is to raise aggregate demand — through higher investment or government expenditure — shifting the AD curve upward until equilibrium reaches full employment. …

Students sometimes say equilibrium is below full employment 'because wages are high' — that is the classical framing, not Keynes's. Keynes's point is about deficient aggregate demand, …