Question

"An economy is operating at under-employment level of income." What does this situation indicate? Discuss any one fiscal measure to tackle this situation.

Hint:

Increasing government spending is a common fiscal policy used to combat under-employment by stimulating demand and encouraging businesses to expand and hire more workers.

Answer 1

An economy operating at an under-employment level of income indicates that the economy is not fully utilizing its available resources, such as labor and capital. There is insufficient demand for goods and services, leading to idle capacity in the economy. This typically results in unemployment and lower levels of income. The economy is producing below its potential output, and workers are underutilized.
One fiscal measure to tackle this situation is increased government spending. The government can invest in public infrastructure projects, welfare programs, or social services. This injection of spending will increase aggregate demand, stimulate production, and create jobs, which will reduce unemployment and increase income levels.
By boosting demand, the government can push the economy toward its potential output and full employment.