ECONOMICS
BUSINESS CYCLES
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
monetary factors are responsible for fluctuations in output and employment.
|
|
|
changes in unemployment are involuntary
|
|
|
markets always clear.
|
|
|
prices and wages are perfectly flexible
|
Detailed explanation-1: -The crucial assumption made by the classical economists is that nominal wages (W) and prices (P) are fully flexible. That is, if inflation were to increase by say, 3 %, nominal wage growth, by this definition, would also rise by the same amount (3 %).
Detailed explanation-2: -Real business cycle theory is the latest incarnation of the classical view of economic fluctuations. It assumes that there are large random fluctuations in the rate of technological change. In response to these fluctuations, individuals rationally alter their levels of labor supply and consumption.
Detailed explanation-3: -New classical economists build their macroeconomic theories on the assumption that wages and prices are flexible. They believe that prices “clear” markets-balance supply and demand-by adjusting quickly.
Detailed explanation-4: -The new classical macroeconomics argues that business cycles occur essentially in a typical market clearing framework in response to real shocks, which include, inter alia, technology shocks and fiscal shock.