Question

In the Austrian View, in a market economy without government intervention, if there is an unusually large number of unemployed workers looking for a job without success

Select one:

a. The market wage rate will increase, giving an incentive to many of the workers to accept a new job, and as a result, the labor market will clear rather quickly.

b. The situation will last for a long time, because of the downward stickiness of the wage rate, unless the government intervenes by increasing its spending.

c. The market wage rate will decline, making it profitable for some businesses to hire many of these workers, and as a result, the labor market will clear rather quickly.

d. Many of the businesses will become pessimistic about their future prospects, leading them to decrease their investment in capital goods, and as a result, the number of unemployed workers will become even larger.

Answer 1

It shall be noted that Austrian views are against government intervention. Hence, option b is ruled out.

Austrian views considers free market is the solution to various economic problems. Thus, issue of unemployed workers looking for job without success would not make businesses pessimistic and further aggravate unemployment problem. Hence option d is ruled out.

The situation that wage rate will fall and business will hire workers at lower wages and labor market will clear rather quickly is the stand that classical economics school of thoughts has taken. Hence, option c is ruled out.

Austrian view believe that when people remain unemployed looking for job in large numbers, market wage rate would increase, giving incentive to workers to accept new jobs and market clears rather rapidly. Austrian view upheld the belief that entrepreneur is alert to unrecognized opportunities for mutual gains. Entrepreneurial discovery helps in bringing innovations and increase productive capacity.

Hence, the option a is correct