The Classical Theory of Income and Employment is premised on three conjectures. 1. Say's Law of Market. 2. Their conviction in wage flexibility. 3. Quantity Theory of Money. Say's Law of Market leads to the conclusion that the economy will be in full employment equilibrium. The production of goods and services generates an equal amount of money income to the suppliers of the factors of production. The saved portion of income is invested. therefore Y = C + I. By full employment it means there is no involuntary unemployment: anyone willing to work on the prevailing wage rate gets employment. Wage rate is determined through the market demand and supply curves of labour. There is is no floor or the ceiling on wage paid to the labour.. Since the output is produced at the level of full employment 'Aggregate Supply' curve' has to be inelastic. 'Aggregate Demand' curve can be obtained from the money supply (MV) as 'Quantity Theory of Money' not only leads to the conclusion that money and price hold a direct and proportional relationship. It also assumes that money is used only facilitate exchange. The intersection of vertical AS curve and downward sloping (Where price and out are measured on Y-axis and X-axis respectively)AD curve determine the price level in the economy, that eventually determines real wage rate.
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23 сен 2024
