According to the Classical Theory of Employment, deviations from the s

According to the Classical Theory of Employment, deviations from the state of full employment are

[amp_mcq option1=”purely temporary in nature.” option2=”permanent in nature” option3=”imaginary situations” option4=”normal situations” correct=”option1″]

This question was previously asked in

UPSC CDS-2 – 2016

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According to the Classical Theory of Employment, deviations from the state of full employment are purely temporary in nature.

Classical economics assumes that markets, including the labour market, clear efficiently due to flexible wages and prices. Any unemployment beyond frictional or structural unemployment is considered temporary and is expected to be quickly resolved by the adjustment mechanisms of the market, restoring the economy to full employment.

In the classical model, a decrease in aggregate demand would lead to falling prices and wages, which in turn would stimulate demand (through mechanisms like the Pigou effect or simply making goods cheaper) and restore full employment. Persistent unemployment is explained by factors like minimum wage laws or union power that prevent wages from adjusting downwards, which are considered market imperfections, not inherent flaws in the market mechanism itself.

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