According to the Classical Theory of Employment, deviations from the state of full employment are
- A.purely temporary in nature.
- B.permanent in nature
- C.imaginary situations
- D.normal situations
Correct answer
Explanation
The correct answer is A, purely temporary in nature. Classical economists held that the economy always tends back to full employment, so any unemployment is short-lived.
The classical theory rests on Say's Law, that supply creates its own demand, so there can be no general overproduction. It also assumes that wages, prices and the rate of interest are fully flexible. If workers are unemployed, wages fall until employers hire everyone willing to work at the going wage; if savings rise, the interest rate falls until investment absorbs them. Unemployment can therefore only be frictional or voluntary, and it corrects itself without government action. John Maynard Keynes challenged this view in his General Theory (1936), after the Great Depression showed that mass unemployment could last for years.
Option B is wrong because permanent unemployment is the Keynesian possibility, not the classical one. Option C is wrong because classical economists accepted that deviations happen; they only denied that they last. Option D is wrong because for them the normal state is full employment, not a deviation from it.
Exam tip: classical = Say's Law + flexible wages, full employment normal; Keynes = effective demand, underemployment equilibrium.
Practice Questions
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Show answer
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