Theory Of Employment — Flashcards

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The Classical theory assumes that the economy naturally operates at full employment in the long run. It believes that free markets, through price and wage flexibility, will automatically adjust to ens…

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Say's Law states that 'Supply creates its own demand.' This means that the act of producing goods generates enough income to purchase all the output produced, so general overproduction or widespread u…

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According to Say's Law, every act of production creates income (in the form of wages, rent, interest, and profit), which in turn creates demand for goods. Since supply generates its own demand, all go…

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In the Classical theory, savings (S) are always equal to investment (I), i.e., S = I. This equilibrium is maintained through flexible interest rates — if savings increase, interest rates fall, encoura…

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Flexible interest rates adjust automatically to balance savings and investment. If savings exceed investment, interest rates fall, making borrowing cheaper and encouraging firms to invest more. If inv…

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In the Classical labour market, employment is determined by the intersection of labour demand and labour supply, which depends on the real wage rate (W/P). Firms hire workers up to the point where the…

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Pigou's Wage Cut Policy suggests that during unemployment, cutting nominal wages will reduce real wages, making labour cheaper for employers. This increases the demand for labour, leading to higher em…

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Classical economists believe in laissez-faire — the idea that free markets are self-regulating. They argue that prices, wages, and interest rates adjust automatically to maintain full employment, so g…