TN State Board 12th Economics Important Questions Chapter 3 Theories of Employment and Income
Question 1.
Define full employment.
Answer:
Full employment refers to a situation in which every able person willing to work at the prevailing wage rate is employed or that person who are willing to work and able to work must have employment.
Question 2.
What is the main feature of rural unemployment?
Answer:
Main feature of rural unemployment – The major feature of rural unemployment is the existence of unemployment in the form of disguised unemployment and seasonal unemployment.
Question 3.
Give short note onfrictional unemployment.
Answer:
It is also known as Temporary unemployment. It occurs because of the imbalance between the demand and supply of labour. It is also because of immobility of labour, lack of skills, shortages of raw materials and break down of machineries.
Question 4.
Give reasons for labour retrenchment at present situation.
Answer:
In recent years new techniques are- adopted. Modem technology introduces inventions and innovations. Due to technical improvements, the need for labourers becomes less and the existing workers are retrenched.
Question 5.
List out the assumptions of Say’s law.
Answer:
- The price cannot be affected by single seller, buyer of commodity.
- There is full employment.
- No single buyer or seller of commodity or an input can affect price.
- Full employment.
- People are motivated by self interest and self – interest determines economic decisions.
- The laissez faire policy is essential for an automatic and self adjusting process of full employment equilibrium. Market forces determine everything right.
- There will be a perfect competition in labour and product market.
- There is wage-price flexibility.
- Money acts only as a medium of exchange.
- Long – run analysis.
- There is no possibility for over production or unemployment.
Question 6.
What is effective demand?
Question
It is the money spent actually on products of industry by the people.
Question 7.
What are the components of aggregate supply?
Answer:
- Aggregate (desired) consumption expenditure (C)
- Aggregate (desired) private savings (S)
- Net Tax payments (T) –
- Personal (desired) transfer payments to the foreigners (Rf)
Aggregate supply =C + S + T + Rf = Aggregate income generated in the economy.
Question 8.
Explain the following in short:
(i) Seasonal unemployment,
(ii) Frictional unemployment,
(iii) Educated unemployment.
Answer:
(i) Seasonal unemployment:
Unemployment during seasons. People are unemployed during off season. Seasonal unemployment happens from demand side.
Eg: Ice cream industry, holiday resorts etc., it is common in agriculture and agro based industries.
(ii) Frictional unemployment:
It is due to imbalance between supply and demand of labour. Eg: people who lose their job in search of new jobs.
(iii) Educated unemployment:
When the qualification of the people do not match with their job, educational system, lack of technical skills, mass student turn out, preference for white collar job are responsible for educated unemployment.
Question 9.
According to classical theory of employment, how wage reduction solve the problem of unemployment diagramatically explain.
Answer:
According to Classical Economist, full employment condition can be achieved by cutting down the wage rate unemployment would be eliminated when wages are determined by the mechanism of Economy itself.
Explanation of the Diagram:
- When the wage rate is OW, then employment is ON.
- As the wage rate is reduced to OW, then the employment has increased to ON.
- According to A.C. Pigou, this theory has a base for developing the solution of unemployment problem.
- The condition of unemployment cannot exist in normal economic conditions.
- This is because as the unemployment arises, wages would fall. In such a case, organisations would prefer to hire new employees, which would result in eliminating unemployment.
- “The law also assumes that there should neither be any intervention of government to regulate the rate of wages nor any role of trade unions.”
- According to Say’s law, the condition of unemployment exists only under some specific conditions. But this condition is momentary.
Question 10.
Write short note on the implications of Say’s law.
Answer:
- Over production or unemployment is not possible.
- The unutilized resources are employed when factors accept rewards according to their productivity under full employment.
- No government intervention due to automatic price mechanism in the economy.
- Equality between savings and investment due to flexibility in interest
- Money serves as a medium of exchange only because people will not hold idle money.
Question 11.
Explain Keynes’ theory in the form of flow chart.
Answer:
Question 12.
What do you mean by aggregate demand ? Mention its components.
Answer:
The aggregate demand is the amount of money which entrepreneurs expect to get by selling the output produced by the number, of labourers employed. So it is the expected income or revenue from the sale of output at different levels of employment.
Four components of aggregate demand
- Consumption demand
- Investment demand
- Government expenditure and
- Net export (Export – Import)
Question 13.
Explain about aggregate supply with the help of diagram.
Answer:
Aggregate supply is the value of total output of goods and services produced in a year. It is equal to the value of national product i.e., National income. It is the required amount of labourers and materials to produce the necessary output.
Aggregate supply = C + S + T + Rf = Aggregate income generated in the economy.
Explanation of the Diagram:
Aggregate supply curves are drawn for the assumption of fixed money wages and variable wages.
Z curve is Linear and money wages are fixed, curve is non-linear, wage rate increases with employment. When full employment level of Nf is reached, it is impossible to increase output by employing more men. So aggregate supply curve becomes inelastic. (Vertical straight line)
Question 14.
Write any five differences between classicim and Keynesianism.
Answer:
Question 15.
Describe the types of unemployment.
an:
In the developing countries like India, the nature of unemployment is different.
(i) Cyclical unemployment:
It occurs during die (town phase -of trade cycle that is during the period of recession and depression income ami output fall leading to widespread unemployment It can be cured by public investment.
(ii) Seasonal unemployment:
Unemployment during seasons. People are . unemployed during off season. Seasonal unemployment happens fromm demand side.
Eg: Ice cream industry, holiday resorts etc., it is common in agriculture and agro based industries.
(iii) Frictional unemployment:
It is due to imbalance between supply and demand of labour. Eg: people who lose their job in search of new jobs.
(iv) Educated unemployment:
When the qualification of the people do not match with their job, educational system, lack of technical skills, mass student turn out, preference for white collar job are responsible for educated unemployment.
(v) Technical unemployment:
In recent years new techniques are adopted. Modem technology introduces inventions and innovations. Due to technical improvements, the need for labourers becomes less and the existing workers are retrenched.
(vi) Structural unemployment:
It is due to the drastic change in the structure of the society. This unemployment is due to lack of demand for the product or shift in demand.
(vii) Disguised unemployment:
This type of unemployment occurs in agriculture. A person is said to be disguisedly unemployed if his contribution to output is less than what he can produce by working for normal hours per day.
Question 16.
Critically explain Say’s law of market.
Answer:
It is the core of classical theory of employment J.B. say enunciated the proposition that “ supply creates its own demand”. Hence there cannot be general over production or the problem of unemployment in the economy. According to say “ when goods are produced by firms in the economy, they pay reward to the factors of production. So each product produced in the economy creates demand equal to its value in the market”.
Assumptions of the Say’s law of market:
- The price cannot be affected by single seller, buyer of commodity.
- There is full employment.
- No single buyer or seller of commodity or an input can affect price.
- Full employment.
- People are motivated by self interest and self-interest determines economic decisions.
- The laissez faire policy is essential for an automatic and self adjusting process of full employment equilibrium. Market forces determine everything right.
- There will be a perfect, competition in labour and product market.
- There is wage-price flexibility.
- Money acts only as a medium of exchange.
- Long – run analysis.
- There is no possibility for over production or unemployment.
Implications of the Say’s law of market:
- Over production or unemployment is not possible.
- The unutilized resources are employed when factors accept rewards according to their productivity under full employment.
- No government intervention due to automatic price mechanism in the economy.
- Equality between savings and investment due to flexibility in interest.
- Money serves as a medium of exchange only because people will not hold idle money.
Criticisms of Say’s law:
- According to Keynes supply does not create its demand. It is not applicable where demand does not increase as much as production increases.
- Unemployment can be removed by increase in the rate of investment. Automatic adjustment process will not remove unemployment.
- Individuals hold money for unforeseen expenses and businessmen keep cash reserve for future activities. So money is not neutral.
- According to say there is no over production but according to Keynes over production is possible.
- Because of under employment in capitalist economies, Keynes regards full employment as a special case.
- The government intervention arises in the case of general over production and mass unemployment.
Question 17.
Narrate the equilibrium between ADF and ASF with diagram.
Answer:
Equilibrium between ADF and ASF could be explained with household and business sector (Two sector economy). It is assumed that consumption function is linear and planned investment is autonomous.
There are two approaches
(i) Aggregate demand – Aggregate supply approach
(ii) Saving – Investment approach
AD and AS approach is only taken to explain the determination of equilibrium level of income and employment.
At the point ‘E’ the AD and AS reach equilibrium. The employment level is N0 at that point. At ON1, employment, the aggregate is N1, R1. But they are able to produce M1, N1.The expected level of profit is M1, R1.
At this level, entrepreneurs will employ more labourers. At the point E, the employment of labour will reach max and it will stop. At the level of beyond ON0 the aggregate demand curve is below the aggregate supply curve. But it will indicate loss to the producers. So they will not employ more than ON0 labour. Equilibrium level of employment need not be the full employment level (N1) the difference between N0 – Nf is the level of unemployment. Sa the concept of effective demand is significant in explaining the under employment equilibrium.
Question 18.
Explain the differences between classical theory and keynes theory.
Answer:
For answer refer q.no : 14
Multiple Choice Questions:
Question 1.
Every able bodied person who is willing to work at the prevailing wage rate is employed called as:
(a) Full employment
(b) Under employment
(c) Unemployment
(d) Employment opportunity
Answer:
(a) Full employment
Question 2.
Structural unemployment is a feature in a:
(a) Static society
(b) Socialist society
(c) Dynamic society
(d) Mixed economy
Answer:
(c) Dynamic society
Question 3.
In disguised unemployment, the marginal productivity of labour is:
(a) Zero
(b) One
(c) Two
(d) Positive
Answer:
(a) Zero
Question 4.
The main concention of the Classical Economic Theory is:
(a) Under employment
(b) Economy is always in the state of equilibrium
(c) Demand creates its supply
(d) Imperfect competition
Answer:
(b) Economy is always in the state of equilibrium
Question 5.
J.B. Say is a:
(a) Neo Classical Economist
(b) Classsical Economist
(c) Modern Economist
(d) New Economist
Answer:
(b) Classsical Economist
Question 6.
According to Keynes, which type of unemployment prevails in capitalist economy ?
(a) Full employment
(b) Voluntary unemployment
(c) Involuntary unemployment
(d) Under employment
Answer:
(d) Under employment
Question 7.
The core of the classical theory of employment is:
(a) Law of Diminishing Return
(b) Law of Demand
(c) Law of Markets
(d) Law of Consumption
Answer:
(c) Law of Markets
Question 8.
Keynes attributes unemployment to:
(a) A lack of effective supply
(b) A lock of effective demand
(c) A lack of both
(d) None of the above
Answer:
(b) A lock of effective demand
Question 9.
__________ Flexibility brings equality between saving and investment.
(a) Demand
(b) Supply
(c) Capital
(d) Interest
Answer:
(d) Interest
Question 10.
_____ theory is a turning point in the development of modern economic theory.
(a) Keynes
(b) Say’s
(c) Classical
(d) Employment
Answer:
(a) Keynes
Question 11.
The basic concept used in Keynes Theory of Employment and Income is:
(a) Aggregate demand
(b) Aggregate supply
(c) Effective demand
(d) Marginal Propensity Consume
Answer:
(c) Effective demand
Question 12.
The component of aggregate demand is:
(a) Personal demand
(b) Government Expenditure
(c) Only export
(d) Only import
Answer:
(b) Government Expenditure
Question 13.
Aggregate supply is equal to:
(a) C +1 + G
(b) C + S + G + (X – M)
(c) C + S + T + (X – M)
(d) C + S + T + Rf
Answer:
(d) C + S + T + Rf
Question 14.
Keynes theory pursues to replace laissez faire by:
(a) No government intervention
(b) Maximum intervention
(c) State intervention in certain situation
(d) Private sector intervention
Answer:
(c) State intervention in certain situation
Question 15.
In Keynes theory of employment and income, _________ is the basic cause of economic depression.
(a) Less production
(b) More demand
(c) Inelastic supply
(d) Less aggregate demand in relation to productive capacity
Answer:
(d) Less aggregate demand in relation to productive capacity
Question 16.
Classical theory advocates:
(a) Balanced budget
(b) Unbalanced budget
(c) Surplus budget
(d) Deficit budget
Answer:
(a) Balanced budget
Question 17.
Keynes theory emphasized on equilibrium.
(a) Very short run
(b) Short run
(c) Very long run
(d) Long run
Answer:
(b) Short run
Question 18.
According to classical theory, rate of interest is a reward for:
(a) Investment
(b) Demand
(c) Capital
(d) Saving
Answer:
(d) Saving
Question 19.
In Keynes theory, the demand for and supply of money are determined by:
(a) Rate of interest
(b) Effective demand
(c) Aggregate demand
(d) Aggregate supply
Answer:
(a) Rate of interest
Question 20.
Say’s law stressed the operation of ______ in the economy.
(a) Induced price mechanism
(b) Automatic price mechanism
(c) Induced demand
(d) Induced investment
Answer:
(b) Automatic price mechanism
Samacheer Kalvi 12th Economics Notes Chapter 3 Theories of Employment and Income
→ Seasonal unemployment: Occurs during seasons and happens from demand side also.
→ Frictional unemployment: (Temporary unemployment) – Imbalance between supply of and demand for labour. ,
→ Educated unemployment: The qualification does not match the job (Highly responsible jobs)
→ Technical unemployment: Less labour is required and technological improvement creates this
→ Structural unemployment: Change in the structure of the society is drastic.
→ Laissez Faire policy: Literally translated from French (Let it be) – A policy of complete non – intervention by Government in the economy.
→ Wage: Price spiral (Flexibility) – A macro economic theory to explain the cause – and effect relationship between rising prices or inflation.
→ ED – Effective Demand
→ AD – Aggregate Demand
→ AS – Aggregate Supply
→ ADF – Aggregate Demand Function
→ ASF – Aggregate Supply Function
→ MPC – Marginal Propensity to Consume
→ MEC – Marginal Efficiency of Capital.
→ Effective demand = ED = Y = C + I = output + Employment
→ Aggregate Demand = AD = C + I + G + (X – M)
→ Aggregate supply = C + S + T + Rf
→ Rf = Aggregate Income generated in the economy.