Part – B

Answer The Following Questions In One or Two Sentences.

Question 21.
Define full employment?
Answer:
Full employment refers to a situation in which every able bodied person who is willing to work at the prevailing wage rate, is employed. In other words full employment means that persons who are willing to work and able to work must have employment or a job.

Question 22.
What is the main feature of rural unemployment?
Answer:

  1. India’s rural economy has both unemployment and underemployment.
  2. The major feature of rural unemployment is the existence of unemployment in the form of disguised unemployment and seasonal unemployment.
  3. In agriculture and agro based industries like sugar, production activities are carried out only in some seasons.


Question 23.
Give short note on frictional unemployment?
Answer:
Frictional Unemployment (Temporary Unemployment):

  1. Frictional unemployment arises due to imbalance between supply of labour and demand for labour.
  2. This is because of immobility of labour, lack of necessary skills, break down of machinery, shortage of raw materials etc.
  3. The persons who lose jobs and in search of jobs are also included under frictional unemployment.

Question 24.
Give reasons for labour retrenchment at present situation?
Answer:

  1. Modem technology being capital intensive requires less labourers and contributes to ’ technological unemployment.
  2. Now a days, invention and innovations lead to the adoption of new techniques there by the existing workers are retrenched.
  3. Labour saving devices are responsible for technological unemployment.

Question 25.
List out the assumptions of Say’s law?
Answer:
The Say’s Law of market is based on the following assumptions:

  1. No single buyer or seller of commodity or an input can affect price.
  2. Full employment.
  3. People are motivated by self interest and self – interest determines economic decisions.
  4. The laissez faire policy is essential for an automatic and self adjusting process of full employment equilibrium. Market forces determine everything right.
  5. There will be a perfect competition in labour and product market.
  6. There is wage-price flexibility.
  7. Money acts only as a medium of exchange.
  8. Long – run analysis.
  9. There is no possibility for over production or unemployment.


Question 26.
What is effective demand?
Answer:

  1. The starting point of Keynes theory of employment and income is the principle of effective demand.
  2. Effective demand denotes money actually spent by the people on products of industry.
  3. The money which entrepreneurs receive is paid in the form of rent, wages, interest and profit.
  4. Therefore effective demand equals national income.

Question 27.
What are the components of aggregate supply?
Answer:
Aggregate demand has the following four components:

  1. Consumption demand
  2. Investment demand
  3. Government expenditure and
  4. Net Export (export – import)

Part – C
Answer The Following Questions In A Paragraph.

Question 28.
Explain the following in short:

  1. Seasonal unemployment
  2. Frictional unemployment
  3. Educated unemployment

Answer:
Seasonal Unemployment:

  1. This type of unemployment occurs during certain seasons of the year.
  2. In agriculture and agro based industries like sugar,production activities are carried out only in some seasons.
  3. These industries offer employment only during that season in a year. Therefore people may remain unemployed during the off season.
  4. Seasonal unemployment happens from demand side also; for example ice cream industry, holiday resorts etc.

Frictional Unemployment (Temporary Unemployment):

  1. Frictional unemployment arises due to imbalance between supply of labour and demand for labour.
  2. This is because of immobility of labour, lack of necessary skills, break down of machinery, shortage of raw materials etc.
  3. The persons who lose jobs and in search of jobs are also included under frictional unemployment.

Educated Unemployment:

  1. Sometimes educated people are underemployed or unemployed when qualification does not match the job.
  2. Faulty education system, lack of employable skills, mass student turnout and preference for white collar jobs are highly responsible for educated unemployment in India.


Question 29.
According to classical theory of employment, how wage reduction solves the problem of unemployment? Diagrammatically explain?
Answer:
The classical theory of employment assumes that the economy operates at the level of full employment without inflation in the long period. It also assumes that wages and prices of goods are flexible and the competitive market exists in the economy (laissez – faire economy). According to the classical theory of employment, 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. The following figure shows the relationship between wage rate and employment:


In the figure, when the wage rate is OW, then the employment is ON. As the wage rate is reduced to OW1, then the employment has increased to ON1. Prof. Pigou has taken this theory as base for developing the solution of unemployment problem.

Question 30.
Write short note on the implications of Say’s law?
Answer:
Implications of Say’s Law:

  1. There is no possibility for over production or unemployment.
  2. If there exist unutilized resources in the economy, it is profitable to employ them up to the point of full employment. This is true under the condition that factors are willing to accept rewards on a par with their productivity.
  3. As automatic price mechanism operates in the economy, there is no need for government intervention. (However, J.M. Keynes emphasized the role of the State)
  4. Interest flexibility brings about equality between saving and investment.
  5. Money performs only the medium of exchange function in the economy, as people will not hold idle money.


Question 31.
Explain Keynes’ theory in the form of flow chart?
Answer:




Question 32.
What do you mean by aggregate demand? Mention its components?
Answer:

  1. The aggregate demand is the amount of money which entrepreneurs expect to get by selling the output produced by the number of labourers employed.
  2. Therefore, it is the expected income or revenue from the sale of output at different levels of employment.
  3. Aggregate demand has the following four components:
    1. Consumption demand
    2. InvestmenTdemand
    3. Government expenditure and
    4. Net Export (export – import)


Question 33.
Explain about aggregate supply with the help of diagram?
Answer:

  1. Aggregate supply function is an increasing function of the level of employment.
  2. Aggregate supply refers to the value of total output of goods and services produced in an economy in a year.
  3. In other words, aggregate supply is equal to the value of national product, i.e., national income.
  4. Aggregate Supply = C + S + T + Rf = Aggregate income generated in the economy.
  5. The following figure shows the shape of the two aggregate supply curves drawn for the assumption of fixed money wages and variable wages.

Aggregate Supply Curve

  1. Z curve is linear where money wages remains fixed; Z<sub>1</sub> curve is non – linear since wage rate increases with employment.
  2. When full employment level of Nf is reached it is impossible to increase output by employing more men.
  3. So aggregate supply curve becomes inelastic (Vertical straight line).
  4. The slope of the aggregate supply curve depends on the relation between the employment and productivity.
  5. Based upon this relation, the aggregate supply curve can be expected to slope upwards.
  6. In reality the aggregate supply curve will be like Z1
  7. Therefore, the aggregate supply depends on the relationship between price and wages.

Question 34.
Write any five differences between classism and Keynesianism?
Answer:
Comparison of Classicism and Keynesianism
Keynesianism:

  1. Short – run equilibrium Saving is a vice
  2. The function of money is a medium of exchange on the one side and a store of value on the other side.
  3. Macro approach to national problems
  4. State intervention is advocated

Classicism:

  1. Long – run equilibrium
  2. Saving is a social virtue
  3. The function of money is to act as a medium of exchange.
  4. Micro foundation to macro problems
  5. Champions of Laissez – fair policy

Part – D
Answer The Following Questions In One Page.

Question 35.
Describe the types of unemployment?
Answer:
The following are the types of unemployment.
Types of unemployment:

  1. Cyclical Unemployment
  2. Frictional Unemployment
  3. Technical Unemployment
  4. Disguised Unemployment
  5. Seasonal Unemployment
  6. Educated Unemployment
  7. Structural Unemployment

1. Cyclical Unemployment:

  1. This unemployment exists during the downturn phase of trade cycle in the economy.
  2. In a business cycle during the period of recession and depression, income and output fall leading to widespread unemployment.
  3. It is caused by deficiency of effective demand.
  4. Cyclical unemployment can be cured by public investment or expansionary monetary policy.

2. Seasonal Unemployment:

  1. This type of unemployment occurs during certain seasons of the year.
  2. In agriculture and agro based industries like sugar, production activities are carried out only in some seasons.
  3. These industries offer employment only during that season in a year. Therefore people may remain unemployed during the off season.
  4. Seasonal unemployment happens from demand side also; for example ice cream industry, holiday resorts etc.

3. Frictional Unemployment (Temporary Unemployment):

  1. Frictional unemployment arises due to imbalance between supply of labour and demand for labour.
  2. This is because of immobility of labour, lack of necessary skills, break down of machinery, shortage of raw materials etc.
  3. The persons who lose jobs and in search of jobs are also included under frictional unemployment.

4. Educated Unemployment:

  1. Sometimes educated people are underemployed or unemployed when qualification does not match the job.
  2. Faulty education system, lack of employable skills, mass student turnout and preference for white collar jobs are highly responsible for educated unemployment in India.

5. Technical Unemployment:

  1. Modem technology being capital intensive requires less labourers and contributes to technological unemployment.
  2. Now a days, invention and innovations lead to the adoption of new techniques there by the existing workers are retrenched.
  3. Labour saving devices are responsible for technological unemployment.

6. Structural Unemployment:

  1. Structural unemployment is due to drastic change in the structure of the society.
  2. Lack of demand for the product or shift in demand to other products cause this type of unemployment.
  3. For example rise in demand for mobile phones has adversely affected the demand for cameras, tape recorders etc.
  4. So this kind of unemployment results from massive and deep rooted changes in economic structure.

7. Disguised Unemployment:

  1. Disguised unemployment occurs when more people are than what is actually required.
  2. Even if some workers are withdrawn, production does not suffer.
  3. This type of unemployment is found in agriculture.
  4. A person is said to be disguisedly by unemployed if his contribution to output is less than what he can produce by working for normal hours per day.
  5. In this situation, marginal productivity of labour is zero or less or negative.


Question 36.
Critically explain Say’s law of market?
Answer:
Criticisms of Say’s Law:
The following are the criticisms against Say’s law:

  1. According to Keynes, supply does not create its demand. It is not applicable where demand does not increase as much as production increases.
  2. Automatic adjustment process will not remove unemployment. Unemployment can be removed by increase in the rate of investment.
  3. Money is not neutral. Individuals hold money for unforeseen contingencies while businessmen keep cash reserve for future activities.
  4. Say’s law is based on the proposition that supply creates its own demand and there is no over production. Keynes said that over production is possible.
  5. Keynes regards full employment as a special case because there is under – employment in capitalist economies.
  6. The need for state intervention arises in the case of general over production and mass unemployment.

Question 37.
Narrate the equilibrium between ADF and ASF with diagram? Equilibrium between ADF and ASF?
Answer:

  • Under the Keynes theory of employment, a simple two sector economy consisting of the household sector and the business sector is taken to understand the equilibrium between ADF and ASF.
  • All the decisions concerning consumption expenditure are taken by the individual households, while the business firms take decisions concerning investment.
  • It is also assumed that consumption function is linear and planned investment is autonomous.
  • There are two approaches to determination of the equilibrium level of income in Keynesian theory. These are:
    1. Aggregate demand – Aggregate supply approach
    2. Saving – Investment approach –
  • In this chapter, out of these two, aggregate demand and aggregate supply approach is alone explained to understand the determination of equilibrium level of income and employment.
  • The concept of effective demand is more clearly shown in the figure.
  • In the figure, the aggregate demand and aggregate supply reach equilibrium at point E. The employment level is N0 at that point.
  • At ON1 employment, the aggregate supply is N, Rr But they are able to produce M1 N1 The expected level of profit is M1, R1
  • To attain this level of profit, entrepreneurs will employ more labourers.
  • The tendency to employ more labour will stop once they reach point E.
  • At all levels of employment beyond, ON0, the aggregate demand curve is below the aggregate supply curve indicating loss to the producers.
  • Hence they will never employ more than ON0 labour.
  • Thus effective demand concept becomes a crucial point in determining the equilibrium level of output in the capitalist economy or a free market economy in the Keynesian system.
  • It is important to note that the equilibrium level of employment need not be the full employment level (N<sub>1</sub>) from the Figure, it is understood that the difference between N0 – N0 is the level of unemployment.
  • Thus the concept of effective demand becomes significant in explaining the under employment equilibrium.


Question 38.
Explain the differences between classical theory and Keynes theory?
Answer:
Keynesianism:

  1. Short – run equilibrium
  2. Saving is a vice
  3. The function of money is a medium of exchange on the one side and a store of value on the other side.
  4. Macro approach to national problems
  5. State intervention is advocated.
  6. Applicable to all situations – full employment and less than full employment.
  7. Capitalism has inherent contradictions
  8. Budgeting should be adjusted to the requirements of economy.
  9. The equality between saving and investment is advanced through changes in income.
  10. Rate of interest is determined by the demand for and supply of money.
  11. Rate of interest is a flow.
  12. Demand creates its own supply.
  13. Rate of interest is a reward for parting with liquidity.

Classicism:

  1. Long – run equilibrium
  2. Saving is a social virtue.
  3. The function of money is to act as a medium of exchange
  4. Micro foundation to macro problems
  5. Champions of Laissez – fair policy
  6. Applicable only to the full employment situation.
  7. Capitalism is well and good.
  8. Balanced budget
  9. The equality between saving and investment is achieved through changes of rate of interest.
  10. Rate of interest is determined by saving and investment.
  11. Rate of interest is a stock.
  12. Supply creates its own demand.
  13. Rate of interest is a reward for saving.