Question

Which of the following factor(s) do NOT affect output and employment in the classical macroeconomic model ?

• A. Quantity of money
• B. Level of government spending
• C. Level of demand for investment goods
• D. Technological progress

Answer 1

The Correct Option is A, B, C

In the classical macroeconomic model, certain factors are considered neutral with respect to their influence on output and employment. Here's an explanation:

• Quantity of money: In the classical model, the quantity of money primarily influences nominal variables like prices and wages through the price level, but not real variables such as output and employment. This idea is consistent with money neutrality, which suggests that changes in the money supply do not affect real economic outcomes in the long run.
• Level of government spending: Government spending is considered neutral in the classical model because it is assumed that any increase in demand due to government expenditure is offset by an equal decrease in private sector demand. This crowding-out effect means that overall output and employment remain unaffected.
• Level of demand for investment goods: Like government spending, in the classical model, investment demand changes do not affect overall output. The model assumes full employment and a self-adjusting economy with flexible prices and wages, meaning that all savings are automatically invested, maintaining output levels.
• Technological progress: Unlike the factors above, technological progress directly affects output and employment by increasing productivity. When technology improves, the same amount of inputs produces more output, enhancing economic growth.

Thus, quantity of money, level of government spending, and level of demand for investment goods do not affect output and employment in the classical macroeconomic model.