Question

Assuming that we are at a full employment equilibrium, suggest a disturbance that would move us away from the full employment equilibrium? Show this disturbance graphically. If we are at an unemployment equilibrium, what policy might you use to bring us to full employment? Explain and show graphically.

Answer 1

From the above diagram, we can see that Quantity of labor is measured along the X axis and the Available Jobs is measured along the Y Axis. Here, point E1 is the equilibrium employment situation where at OL2 amount of labor, Ab is the available Jobs which accurately complement the laborers and therefore the economy is in full equilibrium. Now, if the number of laborers in the economy rises to a huge level, from OL2 to OL1, then the available Jobs in the economy cannot be increased at such a rapid pace, and therefore, the availability of Jobs reduces from OB to OA, thereby resulting in to many laborers in the economy who are now unemployed. Hence new unemployment equilibrium at point E2 is now established.

From the above diagram, we can see that Quantity of labor is measured along the X axis and the Availability of new firms is measured along the Y Axis. Here, point E1 is the equilibrium employment situation where at OL1 amount of labor, OA is the available new firms which do not accurately complement the laborers and therefore the economy is in full unemployment. Now, if we want to move from full unemployment to full employment, then we must try to reduce the entry of foreign workers in to our country, thereby reducing the number of laborers, and additionally, new firms should be promoted to start their business, which will give more employment to the u employment youth in the country. This will, in the long run result in the eradication of unemployment an we shall move towards an economy with equilibrium employment.