ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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equilibrium can only be achieved at full employment
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full employment equilibrium is not automatically attained
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full employment is unobtainable in the long run
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None of the above
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Detailed explanation-1: -The Classical Model says that the economy is at full employment all the time and that wages and prices are flexible. The Keynesian Model says that the economy can be above or below its full employment level and that wages and prices can get stuck.
Detailed explanation-2: -Classical economics focuses on the free market and supply and demand, while Keynesian Economics (sometimes called neoclassical economics) is based on the idea that if demand falls short of total output, governments should step in with fiscal policies.
Detailed explanation-3: -(i) According to classical theory, the economy can only be in a state of equilibrium at full employment level. Any deviation from full employment would be of short period. (ii) Keynes’ theory is of the viewpoint that an economy can be in equilibrium even at less than full employment level.
Detailed explanation-4: -British economist John Maynard Keynes spearheaded a revolution in economic thinking that overturned the then-prevailing idea that free markets would automatically provide full employment-that is, that everyone who wanted a job would have one as long as workers were flexible in their wage demands (see box).