The graph shows AD₂ below AD. With AD₂, the economy settles at E₂. What does this mean? A dashed 45° line, an AD line that meets it at F at the full-employment income of ₹400 crore, and a lower line AD₂. At ₹400 crore of income, AD₂ is ₹340 crore (point D), ₹60 crore below F. AD₂ meets the 45° line at E₂, at an income of ₹280 crore.

The graph shows AD₂ below AD. — CUET Economics practice

The graph shows AD₂ below AD.

Question 25

MediumOriginal question

The graph shows AD₂ below AD. With AD₂, the economy settles at E₂. What does this mean?

A dashed 45° line, an AD line that meets it at F at the full-employment income of ₹400 crore, and a lower line AD₂. At ₹400 crore of income, AD₂ is ₹340 crore (point D), ₹60 crore below F. AD₂ meets the 45° line at E₂, at an income of ₹280 crore.

The economy is at full employmentCorrect answerYour answerEquilibrium income is ₹280 crore, with involuntary unemploymentCorrect answerYour answerPrices rise because demand is too highCorrect answerYour answerEquilibrium income is ₹340 croreCorrect answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer B

Correct answer: B

AD₂ meets the 45° line at E₂, at Y = 280, short of the full-employment income of 400.
Output and jobs are below full employment: an underemployment equilibrium.

Concept: Equilibrium with deficient demand
Typical timeTypical: 70 s
Your timeYours: —

The rule this testsDeficient demand and the deflationary gap

Practise this chapter →

Ten questions from Excess & Deficient Demand, at your own pace.

Practise this chapter →

Ten questions from Excess & Deficient Demand, at your own pace.

The graph shows AD₂ below AD.

Question 25

Explanation