Question

1. What is the main statement of Classical Economics regarding labor market?

1. What would that mean regarding the shape of the SRAS and the LRAS?
2. What does that mean regarding Monetary and Fiscal Policies?

2. What is the main statement of Keynesian economics regarding wages and the labor market?

1. What would that mean regarding the shape of the SRAS and the LRAS
2. What does that mean regarding Monetary and Fiscal Policies?

Answer 1

A)The main statement of Classical Economixs regarding labour market is that the wages are fully flexible and the workers have perfect information about the price level.. Therefore, labour market always clears and there is full employmemt in the Economy.

It would mean that the SRAS and LRAS would both ne Vertical.

It means that Economy is always at full employment. As a result of that, any policy to stimulated Aggregate Demand would be ineffective as the Aggregate Supply Curve is Vertical. The effects of monetary and fiscal policy would only affect price and not Output. Thus, there is no use of Monetary and Fiscal policy according to Classical Economics.

B) According to Keynesian Economics, in the Short Run, the money Wages are rigid, especially in the downward direction. As a result of which, there exists involuntary Unemployment in the Economy. Therefore, the Economy is not in full employmemt in the short run. But in the long run, since money Wages are flexible, there is full employment.

Because of rigidity of money Wages in short run, SRAS is Upward sloping. But as money Wages full adjust and are flexible in the long run, LRAS is Vertical.

This means that in the short run, Fiscal and Monetary policy are effective in influencing output by influencing Aggregate Demand. However, in the long run, Monetary and Fiscal policy are of no use for influencing output.