Economics

Q1: Compare the classical and Keynesian views on the speed of wage and price adjustment. What are the important consequences of the differences in their wages?|

|ANS – Speed of price and wage adjustment is more in classical views as classical views assume flexibility of prices, wages and interest whereas as per |

|Keynesian views there is price and wage rigidity. The classical system assumes a perfectly competitive labour market and flexible wages whereas Keynesian |

|system assumes that wages are rigid. The important consequences of the difference in their wages is that in classical system due to flexible wages and price |

|the labour market adjusts instantly to the full employment equilibrium, whenever there is any discrepancy between labour demand and supply. Thus, this ensures |

|that labour market is always in equilibrium and there is a state of full employment in the economy. |

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|Q2: Why does the aggregate demand curve slope downwards? Give real world examples of three effects that explain the slope of the curve? |

|ANS- Aggregate demand curve slopes downward due to inverse relationship with aggregate price level whereas aggregate price level bears a positive relationship |

|with the aggregate supply curve. As the price of a product rises its demand tends to decline, this is the inverse relationship. 3 effects that explain the |

|slope of the curve are- |

|Pigou's wealth effect- It states that with...