Question

Which of the following is NOT a postulate of the Classical Model of full-employment equilibrium?

• A. Wage-Price flexibility
• B. Perfect information about the market
• C. Consumption and saving functions depend on income.
• D. The price level moves proportionately with the quantity of money.

Answer 1

The Correct Option is C

The question asks which option is NOT a postulate of the Classical Model of full-employment equilibrium. Let's analyze each option to determine the correct answer.

1. Wage-Price flexibility: This is a fundamental assumption of the Classical Model. It states that wages and prices are flexible, allowing labor and goods markets to clear, thereby achieving full employment.
2. Perfect information about the market: Another key assumption of classical economics is that all participants in the economy have perfect information, leading to optimal decision making and the efficient allocation of resources.
3. Consumption and saving functions depend on income: While this statement is generally true in economics, it is not specific to the Classical Model's assumptions. Instead, it is more aligned with Keynesian economics, which emphasizes the dependence of consumption on income levels.
4. The price level moves proportionately with the quantity of money: This is related to the classical quantity theory of money, which posits a direct relationship between the money supply and the price level, assuming output is at full employment.

The statement "Consumption and saving functions depend on income" does not directly relate to the unique postulates of the Classical Model. Instead, it aligns more closely with Keynesian economics, which focuses on how income levels affect economic variables such as consumption and saving. Therefore, the correct answer is that this statement is NOT a postulate of the Classical Model.