Question

the classical economists believed that unemployment could not persist because:

A: the government would step in and stimulate the economy by increasing government spending
B: rising prices would make up for any deficiency in spending and make it profitable to rehire workers
C: falling wages would cause businesses to expand employment
D: unemployment benefits would eventually run out, and voluntarily unemployed workers would return to their jobs
E: workers would move abroad, reducing the unemployment rates.

Answer 1

Ans : "C"..........as Pigou argues the wage cut will allow the businessman to hire more people and with out loosing the old ones, since the labour can not move due to lower wages across the board..........

Answer 2

SriHari, Yes the answer is "C" but that is exactly why John Maynard Keynes developed his theories of the Macro economy, for as he said, in a depression, one cannot expect firms to hire more workers as there is no incentive since there is little demand for their product, and one cannot expect the consumer to increase his spending since he probably has lost his job, and therefore the government, with its ability to deficit spend (spend more on programs to put people back to work on infrastructure projects, etc than the take in in tax revenue), is the only entity that can help out. wmw