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    Question

    Which of the following statement is/are true regarding classical theory of income and employment?

    1. Classical economist believe that the economy needs fiscal policy

    2. It describes economic growth in short run

    3. According to this model, the wages are sticky

    A Only 3 Correct Answer Incorrect Answer
    B Only 2 Correct Answer Incorrect Answer
    C Only 1 Correct Answer Incorrect Answer
    D None Correct Answer Incorrect Answer

    Solution

    The classical theory of employment and output is a long run theory. It is based on two basic notions, viz. Say’s law and wage price flexibility. The classical economist believed that given wage price flexibility, there are automatic forces in the economic system that tends to maintain full employment and produce output at that level. Thus, they rule out the need of fiscal policy for correction of economy.

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