Question : The classical theory of income determination assumes that:
Option 1: Prices and wages are sticky
Option 2: Prices and wages adjust quickly
Option 3: Consumption is the main driver of economic growth
Option 4: Government intervention is necessary to achieve full employment
Correct Answer:
Prices and wages adjust quickly
Solution : The correct answer is (b) Prices and wages adjust quickly
The classical theory of income determination, often associated with classical economists such as Adam Smith and David Ricardo, posits that markets are efficient and self-adjusting. According to this theory, prices and wages are flexible and will adjust quickly to equate supply and demand in the economy.
In the classical view, if there is a temporary imbalance between aggregate demand and aggregate supply, prices and wages will adjust to restore equilibrium. For example, if there is excess demand in the economy, prices will rise, reducing demand and increasing supply until equilibrium is reached.
The classical theory emphasizes the role of free markets and believes that government intervention is generally unnecessary for achieving full employment and economic growth. It places less emphasis on consumption as the main driver of economic growth compared to the Keynesian theory.
