Read the following statements – Assertion (A) and – Class 12 Economics

Question 61 of 104

Q. Read the following statements - Assertion (A) and Reason (R). Choose the correct alternative given below : Assertion (A) : Full employment situation refers to absence of involuntary unemployment. Reason (R) : Under full employment situation, all the willing and able bodied people get employment at the prevailing wage rate. Alternatives : (A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). (B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A). (C) Assertion (A) is true, but Reason (R) is false. (D) Assertion (A) is false, but Reason (R) is true.

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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. …

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Full employment means everyone willing and able to work at the current wage can find a job, thus there is no involuntary unemployment.

In economics, understanding the nuances of employment and unemployment is crucial. When we talk about 'full employment', it's a concept often misunderstood to mean a situation where absolutely everyone has a job. However, the economic definition is more precise and allows for certain types of unemployment.

Full employment refers to a situation where all those who are willing to work and are able to work at the prevailing wage rate are employed. It does not imply zero unemployment. Instead, it signifies the absence of involuntary unemployment. This distinction is vital.

Note

Even under full employment, some level of unemployment will always exist. This is typically due to what economists call 'natural unemployment', which includes frictional and structural unemployment. Frictional unemployment occurs when people are temporarily between jobs, searching for new ones, or just entering the workforce. Structural unemployment arises from a mismatch between the skills workers have and the skills employers need, or from geographical mismatches. These are considered 'voluntary' in the sense that individuals are either choosing to search for a better job or are not yet equipped for available jobs.

Involuntary unemployment is the key concept here. It occurs when individuals are willing and able to work at the prevailing wage rate but cannot find employment. They are actively seeking work but are unable to secure a job. This is the type of unemployment that an economy aims to eliminate to achieve full employment.

Now, let's examine the given statements:

Assertion (A): Full employment situation refers to absence of involuntary unemployment. This statement aligns perfectly with the economic definition. If there is no involuntary unemployment, it means everyone who wants to work at the prevailing wage rate has a job. Therefore, Assertion (A) is true. …

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