• Employment:

• A situation when a person is able and willing to take up a job and

gets employed.
• Full Employment:
• A situation where all those workers who are able and willing to
work get employment.
• Under Employment:
• A situation when people are engaged in jobs but they do not get
these jobs according to their capabilities, efficiency and
qualifications.
• Unemployment:
• A situation when a person is willing to work but does not get
opportunity to work
• Involuntary Unemployment :
• A situation when the workers are willing to work under
any conditions and at any wage rate but they fail to get
employment.
• Voluntary Unemployment:
• When the economy offers employment opportunities to
the workers, but they themselves are not willing to take
up jobs because the employment conditions such as
wage rate, location, promotional avenues, physical
environment, attitude of the employer, etc., do not suit
them.
• Structural Unemployment :
• It is the result of the backwardness and underdevelopment of an
economy.
• Disguised Unemployment:
• When more workers are engaged in a work than actually required
to work, it is called disguised unemployment
• Equilibrium level of employment:
• level of employment where aggregate demand equals aggregate
supply.
• Full employment level:
• the level of employment where all the available supply of labour
is gainfully employed.
• Excess demand:
• when aggregate demand exceeds aggregate supply at full
employment level.
• Deficient demand :
• when aggregate demand falls short of aggregate supply at full
employment level.
• Inflationary gap:
• it occurs as an excess of anticipated expenditure over available
output at full employment level.
• Deflationary gap:
• it occurs as an excess of available aggregate output over
anticipated aggregate expenditure
• Ex- ante saving :
• Ex- ante saving is what the savers plan (or intend) to save at different
levels of income in an economy. It is also known as intended saving
or planned saving.
• Ex- post saving:
• It refers to actual or realized saving in an economy during a year.
• Ex- ante Investment:
• Ex- ante investment is what the investors plan (or intend) to invest at
different levels of income in an economy. It is also known as intended
investment or planned investment.
• Ex- post investment:
• It refers to actual or realized investment in an economy during a year.
Aggregate Demand
• The total demand for goods and services in an economy in a year’s time is
called aggregate demand. It is expressed in terms of total expenditure of the
community.
• Goods and services are demanded for two purposes- (1) Consumption, & (2)
Investment.
• Consumption is of two types: private (household) consumption & public
(government) consumption.
• Investment is also of two types: private (household) investment & public
(government) investment.
Aggregate Demand (AD) = Consumption Demand (C) + Investment Demand
(I)
• AD = C + I
• Y=C+I
• Components of Aggregate Demand:
There are four major components of aggregate
demand
• 1. Household consumption expenditure (C);
• 2. Government final consumption expenditure
(G);
• 3. Private and public investment expenditure (I);
• 4. Net export (X-M)
Aggregate Supply: It refers to the money value of all goods and
services produced in a country in a year’s time. It, in fact, refers to
the national income of a country because it is the money value of
all goods and services produced in a year’s time.
Aggregate Supply
= Domestic Product = Total Factor Incomes = National Income
Aggregate Supply (AS) = Consumption (C) + Saving (S)
Y=C+S
Determination of Equilibrium:
• Determination equilibrium of an economy can be studied by
two approaches:
• 1. As equality of aggregate demand and aggregate supply; and
• 2. As equality of saving and investment
• AS and AD Approach:
• Equilibrium level of income is determined where aggregate
demand curve cuts aggregate supply.
• In other words, the level of income will be in equilibrium
where aggregate demand is equal to aggregate supply
• Alternative Approach to Equilibrium (Saving & Investment
Approach):
• AD is: Y = C + I, ……………………………………… (1)
• AS is: Y = C + S, …………………………………….. (2)
• By putting together equations (1) and (2),
• we get C + I = C + S
• Hence, I = S
• i.e., aggregate investment equals aggregate saving in the economy
• Equilibrium level of employment (or income) is
determined by the intersection of the aggregate demand and
aggregate supply schedule.
• The classical economists held the view that this equilibrium
level of employment would be full employment level. There
will be no involuntary unemployment either of labour or of
capital. If there were to be any unemployment resources,
wage rates and interest rates would move. Movement in the
wage rates and interest rates would serve to bring full
employment in the economy.
• Prof. J. M. Keynes did not agree with this view of the
classical economists. He gave three types of equilibrium
situations:
• 1. Equilibrium at full employment level;
• 2. Equilibrium at less than full employment level;
• 3. Equilibrium at more than full employment level;
1. Equilibrium at full employment level: this will obtain when the
equality of AD and AS occurs at a level where at the available
resources are gainfully employed.
2. Equilibrium at less than full employment level (Deflationary gap):
this will occur when the aggregate demand is not sufficient to absorb
all those who seek employment. Clearly, there will be involuntary
unemployment in the economy. This would have been caused by
deficient demand.
3. Equilibrium at more than full employment level (Inflationary
gap): this will occur when the available resources in the economy are
not sufficient to meet the aggregate demand for goods and services.
Clearly, this situation is caused by excess demand in the economy
Causes of Excess Demand (Inflationary gap)
and Deficient Demand (Deflationary gap):
Effects of Excess Demand:
• In case of excess demand, the planned aggregate expenditure is more than
the planned aggregate output.
• All the available resources are already fully employed. Therefore, there is
no chance to increase the level of employment further. No additional
resources are available, it will not be possible either to increase the level of
output.
• But, in case, there is already full employment in the economy large aggregate
expenditure in the economy would result in a rise in the general price level.
Thus, excess demand has a general inflationary potential and that is why
excess demand is known as inflationary gap.
Effects of Deficient Demand:
• In case of deficient demand, the planned aggregate expenditure is less
than the planned aggregate output.
• In this case, there will be tendency to curtail the employment. Since
the aggregate output cannot be absorbed by the aggregate expenditure,
the surplus availability of output will result in a fall in the general
price level.
• Thus, deficient demand has a general deflationary potential and that
is why it is also known as deflationary gap.
Measures to Correct Deficient Demand:

1. Fiscal policy:
1. Reduction in tax rates
2. Increase in government expenditure.
2. Monetary policy:
1. Reduction in bank rate
2. Reduction in reserve ratios
3. Purchase of government securities.
3. Export promotion:
Measures to Correct Excess Demand:

1. Fiscal policy:
1. Rise in tax rates
2. Decrease in government expenditure.
2. Monetary policy:
1. Rise in bank rate
2. Increase in reserve ratios
3. Sale of government securities.
3. Import promotion: