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What does Say's law of Market propose?
What does Say's law of Market propose?
According to classical economists, what is the primary condition for achieving full employment?
According to classical economists, what is the primary condition for achieving full employment?
Which term describes temporary unemployment due to the natural dynamics of an economy?
Which term describes temporary unemployment due to the natural dynamics of an economy?
What does the classical theory suggest about involuntary unemployment?
What does the classical theory suggest about involuntary unemployment?
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What policy do classical economists advocate for regarding government intervention in the economy?
What policy do classical economists advocate for regarding government intervention in the economy?
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Which type of unemployment is caused directly by a mismatch of skills and job requirements?
Which type of unemployment is caused directly by a mismatch of skills and job requirements?
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What did Adam Smith's doctrine suggest about the economy?
What did Adam Smith's doctrine suggest about the economy?
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What statement best describes full employment according to Spencer?
What statement best describes full employment according to Spencer?
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What does Keynes argue about Say's law during periods of depression?
What does Keynes argue about Say's law during periods of depression?
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What does Keynes believe about equilibrium income and full employment income?
What does Keynes believe about equilibrium income and full employment income?
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Which concept did Keynes reject regarding the classical theory of employment?
Which concept did Keynes reject regarding the classical theory of employment?
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What does Keynes attribute to involuntary unemployment?
What does Keynes attribute to involuntary unemployment?
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How did Keynes critique Pigou's approach to unemployment?
How did Keynes critique Pigou's approach to unemployment?
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What is the relationship between saving and investment in a classical economy?
What is the relationship between saving and investment in a classical economy?
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According to classical theory, what determines the level of employment?
According to classical theory, what determines the level of employment?
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What does the equation W/P = MPl signify in classical economics?
What does the equation W/P = MPl signify in classical economics?
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What is required for full employment in a classical economy?
What is required for full employment in a classical economy?
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According to the classical model, what impact does a change in the interest rate have?
According to the classical model, what impact does a change in the interest rate have?
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What does full employment imply according to Hanson's definition?
What does full employment imply according to Hanson's definition?
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Which of the following is NOT an assumption of the classical theory of employment?
Which of the following is NOT an assumption of the classical theory of employment?
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What characterizes full employment in a capitalist economy according to classical theory?
What characterizes full employment in a capitalist economy according to classical theory?
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What does the Fisher Quantity Theory of Money primarily explain?
What does the Fisher Quantity Theory of Money primarily explain?
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According to the classical theory, what leads to an increase in the supply of labor?
According to the classical theory, what leads to an increase in the supply of labor?
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What is the significance of labour market equilibrium in the classical model?
What is the significance of labour market equilibrium in the classical model?
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What is the primary focus of production in a classical economic model?
What is the primary focus of production in a classical economic model?
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What does classical theory suggest about savings and investments?
What does classical theory suggest about savings and investments?
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Which factor is considered to be flexible according to classical employment theory?
Which factor is considered to be flexible according to classical employment theory?
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What role does the law of diminishing marginal returns play in classical employment theory?
What role does the law of diminishing marginal returns play in classical employment theory?
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In the context of classical theory, what is implied by the statement 'the total output of the economy is parts of consumption and investment expenditure'?
In the context of classical theory, what is implied by the statement 'the total output of the economy is parts of consumption and investment expenditure'?
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What does the equation MV=PT represent?
What does the equation MV=PT represent?
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What is assumed to remain constant in the classical economists' theory in the short run?
What is assumed to remain constant in the classical economists' theory in the short run?
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What happens to aggregate demand if the money supply increases according to the Fisher Quantity Theory of Money?
What happens to aggregate demand if the money supply increases according to the Fisher Quantity Theory of Money?
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According to classical theory, what is the effect of money on real variables?
According to classical theory, what is the effect of money on real variables?
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What assumption about unemployment does the classical theory make?
What assumption about unemployment does the classical theory make?
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What is the result of a decrease in money wages, according to classical theory?
What is the result of a decrease in money wages, according to classical theory?
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According to Say's law of the market, what is not expected to occur?
According to Say's law of the market, what is not expected to occur?
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What happens to aggregate output when money supply increases from m1 to m2?
What happens to aggregate output when money supply increases from m1 to m2?
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Study Notes
Classical Theory of Employment
- The classical theory posits that a free-enterprise economy inherently tends toward full employment.
- It advocates for laissez-faire economic policies (minimal government intervention).
- The theory hinges on the concept of Say's Law, which posits that supply creates its own demand.
- The theory assumes wage and price flexibility allowing the market to adjust to equilibrium.
- Classical theorists believe there is no involuntary unemployment in capitalist economies.
Key Concepts
- Say's Law of Market: Supply generates its own demand; thus, overproduction and underconsumption are unlikely.
- Full Employment: All who wish to work find employment; frictional or structural unemployment are considered temporary issues.
- Laissez-faire Policy: The economy operates best with minimal government intervention.
- Labour Market Equilibrium: The equilibrium of labor supply and demand determines employment and wage rates.
- Capital Market Equilibrium: Equilibrium between savings and investment.
- Money Market Equilibrium: The quantity of money in circulation, in relation to aggregate output, determines the price level.
Introduction
- Classical economists hypothesize that free enterprise economies tend naturally towards full employment.
- This implies an economy should adopt laissez-faire policies, avoiding government interference.
- Central to the classical view is Adam Smith's concept of the "invisible hand."
Two Basic Concepts
- Say's Law of Market: Any increase in production leads to increased income and thus more demand, removing any possibility of excess supply or under consumption.
- Wage-Price Flexibility and Full Employment: The classical economists assume that wages and prices adjust to clear markets, eliminating involuntary unemployment. Anyone willing to work at the going wage will find employment.
Full Employment
- Definition (Spencer): A situation in which every person willing to work and capable of doing so is employed (excluding those who are frictionally or structurally unemployed).
- Frictional Unemployment: Temporary unemployment occurring due to factors such as worker mobility, lack of suitable jobs, or limited information. This is viewed as a normal aspect of a dynamic economy.
- Structural Unemployment: Mismatch between job skills and available jobs. Potentially a longer-term issue stemming from technological or industrial changes.
Assumptions of the Theory
- Capitalist Closed Economy: The theory assumes an economy without significant external factors impacting employment or economic activity.
- Long-Run Period with No Inflation: The theory primarily applies to long-term conditions.
- Perfect Competition: Perfect competition exists in all markets (labor, money, product).
- Homogeneous Labor: All workers are equally qualified and capable of performing any given job.
- Investment as Part of Spending: The entire production is allocated to either consumption or investment.
- Money as Medium of Exchange: Money facilitates transactions without interfering with overall supply and demand dynamics.
- No Technological Change: The theory involves conditions where technology does not play a significant role in changing the dynamics of the economy.
- Flexible Prices and Wages: The system adjusts freely to maintain equilibrium.
- Saving Equals Investment: Savings automatically equate to investment in the market.
- Diminishing Returns: The law of diminishing marginal returns applies to most sectors, including agriculture.
Output Determination
- Full employment is a key characteristic of a capitalist economy.
- Employment levels are determined by the equilibrium between demand and supply for labor.
- Aggregate supply and aggregate demand are equal at the full employment level.
Money Market Equilibrium
- The supply of money determines the aggregate price level (Fisher Quantity Theory).
- The classical approach assumes that output remains relatively stable in the short term when there are changes in the money supply.
Implications
- Involuntary unemployment doesn't exist in the classical model.
- Wage and price flexibility, dictated by supply and demand, eliminate unemployment.
- The system's inherent self-adjustment ensures overall equilibrium.
Criticisms
- Keynes argued that Say's Law doesn't hold during economic downturns (depressions).
- Keynesian theory emphasizes the role of aggregate demand in influencing employment.
- Keynes argues that involuntary unemployment can exist, especially due to a deficiency of demand in the economy.
- He believed the classical theory neglected short-run problems, and that the classical model did not account for the existence of involuntary unemployment.
Conclusion
- The classical theory of employment offers a powerful framework for understanding the principles of a fully functioning economy. However, it has been subject to criticism by economists like Keynes, particularly during periods of economic downturn.
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Description
This quiz explores the Classical Theory of Employment, focusing on its key concepts such as Say's Law, full employment, and laissez-faire policies. It examines how the theory addresses wage and price flexibility in a free-enterprise economy. Test your understanding of these fundamental economic principles and their implications for employment.
