"An economy is operating at under-employment level of income." What does this situation indicate ? Discuss any one fiscal measure to tackle this situation. Elaborate using a hypothetical numerical example, how a given initial increase in investment affects the level of final income of the economy.

Question

Accepted Answer

**Under-employment level of income** indicates that the economy is operating below its full employment potential. Resources (labour, capital) are not fully utilized, leading to unemployment and idle capacity. This situation indicates **deficient demand** — aggregate demand is insufficient to purchase the full employment output.

**Fiscal measure to tackle this situation:**

**Increase in Government Spending:**
Government can increase expenditure on infrastructure projects like roads, bridges, hospitals. This directly boosts aggregate demand.

**Numerical Example:**
If MPC = 0.75 and government increases spending by ₹200 crore:
- Multiplier (K) = 1/(1-0.75) = 4
- Change in Income = K × ΔG = 4 × 200 = ₹800 crore
- The initial increase of ₹200 crore generates ₹800 crore additional income through the multiplier effect