Question

Which of the following statements about classical theory of employment is correct?

• A. The economy always remains in a state of full employment
• B. There is no possibility of overproduction or underproduction in the economy
• C. Both (A) and (B)
• D. None of these

Hint:

Classical theory assumes that the economy is always at full employment and that supply will always meet demand without overproduction or underproduction.

Answer 1

The Correct Option is C

Step 1: Understanding Classical Theory of Employment:
Classical economics, developed by economists like Adam Smith and David Ricardo, posits that the economy is self-regulating. It suggests that markets, including the labor market, will always adjust to ensure that the economy operates at full employment, meaning everyone who wants to work at the prevailing wage rate can find employment. Step 2: Analyzing the Options:
- Option (A) The economy always remains in a state of full employment: Classical theory assumes that the economy naturally adjusts to full employment, and any unemployment is voluntary, based on wages or labor preferences. Therefore, full employment is the natural state.
- Option (B) There is no possibility of overproduction or underproduction in the economy: Classical economics assumes that markets clear at the equilibrium price, meaning that there is neither overproduction nor underproduction, as supply always meets demand.
- Option (C) Both (A) and (B): Both statements are correct under classical theory. Full employment and equilibrium are key tenets of this economic perspective.
- Option (D) None of these: This is incorrect, as both (A) and (B) are central to classical theory.
Step 3: Conclusion and Answer:
The correct answer is (C), as both statements (A) and (B) reflect the core beliefs of classical economics regarding full employment and market equilibrium.