15 extra multiple-choice questions for Theories of Employment and Income (12th Standard Economics, Samacheer Kalvi), beyond the ones printed in the textbook — each with the correct option highlighted and a clear, worked explanation. Free to read in English and Tamil.
Q1
According to Abba P. Lerner, what defines the level of full employment?
- A. When involuntary unemployment is completely absent
- B. When any further increase in spending results in an inflationary spiral of wages and pricesCorrect
- C. When every able-bodied person is employed at the prevailing wage rate
- D. When the marginal productivity of labour becomes zero
Explanation. Abba Lerner defined full employment as that level of employment at which any further increase in spending would result in an inflationary spiral of wages and prices.
Q2
Which type of unemployment occurs due to massive and deep-rooted changes in the economic structure of a society, such as a shift in demand from cameras to mobile phones?
- A. Frictional Unemployment
- B. Technical Unemployment
- C. Structural UnemploymentCorrect
- D. Cyclical Unemployment
Explanation. Structural unemployment results from drastic, deep-rooted changes in the economic structure of society, such as when demand shifts from one product to another.
Q3
In an economy, if some workers can be withdrawn from a production activity without reducing the total output, what is the marginal productivity of these workers?
- A. Equal to the average product
- B. Positive and increasing
- C. Zero, negative, or less than normalCorrect
- D. Equal to the wage rate
Explanation. Disguised unemployment occurs when more people are employed than required. In this case, the marginal productivity of labour is zero, less than normal, or negative.
Q4
Which of the following is a key assumption of the Classical Theory of Employment regarding market structure and government involvement?
- A. Monopolistic competition with heavy state regulation
- B. Perfect competition in product and labour markets with a laissez-faire economyCorrect
- C. Oligopolistic market with a centralized planning authority
- D. Price rigidity with active state intervention
Explanation. The classical economists assumed that the economy operates under perfect competition in both product and factor markets with no government intervention.
Q5
J.B. Say's law of markets states that aggregate supply must be equal to aggregate demand in which of the following senses?
- A. Ex-post sense as an accounting identity
- B. Ex-ante sense where planned production equals planned purchaseCorrect
- C. Only in the short-run equilibrium period
- D. When money serves as a store of value
Explanation. While saving and investment are always equal in the ex-post accounting sense, Say's law states that aggregate supply and aggregate demand are equal in the ex-ante sense.
Q6
Why did J.M. Keynes reject the classical view that money is neutral and acts only as a medium of exchange?
- A. Because money supply is completely controlled by commercial banks
- B. Because individuals hold money for unforeseen contingencies and future business activitiesCorrect
- C. Because the rate of interest is determined solely by saving and investment
- D. Because money has no intrinsic value in a capitalist economy
Explanation. Keynes argued that money is not neutral because people hold cash for unforeseen contingencies and business reserves.
Q7
What is the starting point of J.M. Keynes's theory of employment and income?
- A. Say's Law of Markets
- B. Wage-Price flexibility
- C. The principle of effective demandCorrect
- D. Interest rate flexibility
Explanation. The principle of effective demand is the starting point of Keynes's theory of employment and income, representing total expenditure on goods and services.
Q8
According to Keynesian theory, effective demand is determined by the intersection of which two functions?
- A. Marginal propensity to consume and marginal propensity to save
- B. Saving function and investment function
- C. Aggregate demand function and aggregate supply functionCorrect
- D. Liquidity preference and money supply
Explanation. Effective demand is determined by the forces of aggregate supply and aggregate demand, where the aggregate demand function intersects the aggregate supply function.
Q9
Which of the following is NOT a component of the Aggregate Supply Function in the Keynesian model?
- A. Desired private savings
- B. Desired private investment expenditureCorrect
- C. Net tax payments
- D. Personal transfer payments to foreigners
Explanation. The components of aggregate supply are consumption, savings, taxes, and transfers to foreigners. Desired investment is a component of aggregate demand.
Q10
In the Keynesian theory of employment, when the full employment level is reached, the aggregate supply curve becomes:
- A. Perfectly elastic
- B. Perfectly inelasticCorrect
- C. Downward sloping
- D. Positively sloped at a 45-degree angle
Explanation. Once full employment is reached, it is impossible to increase output by employing more workers, making the aggregate supply curve vertical.
Q11
In J.M. Keynes's system, what does the difference between the equilibrium level of employment and the full employment level represent?
- A. Hyperinflationary gap
- B. Voluntary unemployment
- C. The level of involuntary unemploymentCorrect
- D. Frictional unemployment
Explanation. The difference between the actual underemployment equilibrium and the full employment level represents involuntary unemployment.
Q12
While classical economists advocate a balanced budget, what is the Keynesian view on budgeting?
- A. The budget must always show a surplus
- B. Budgeting should be adjusted to the requirements of the economyCorrect
- C. The budget must remain completely unregulated by the state
- D. Capital expenditure should never be included in the budget
Explanation. Under Keynesianism, budgeting should be adjusted to the requirements of the economy, whereas Classicism champions a balanced budget.
Q13
According to classical theory, the rate of interest is determined by saving and investment. How is it determined in Keynesian theory?
- A. By the interaction of aggregate demand and aggregate supply
- B. By the level of national income and consumption
- C. By the demand for and supply of moneyCorrect
- D. By the marginal efficiency of capital alone
Explanation. In Keynesianism, the rate of interest is determined by the demand for money (liquidity preference) and the supply of money.
Q14
How is the rate of interest characterized in Classical theory compared to Keynesian theory?
- A. Classical theory views it as a flow, while Keynesian theory views it as a stockCorrect
- B. Classical theory views it as a stock, while Keynesian theory views it as a flow
- C. Both theories treat it as a static flow variable
- D. Both theories treat it as a dynamic stock variable
Explanation. Classical theory views the interest rate as a flow determined by saving and investment, whereas Keynesian theory views it as a stock.
Q15
According to Keynesianism, saving is considered a vice because it can reduce aggregate demand. What is the classical view of saving?
- A. Saving is an economic leak that always causes depression
- B. Saving is a social virtue that leads to investment and growthCorrect
- C. Saving must be discouraged through heavy state taxation
- D. Saving is completely neutral and does not affect the rate of interest
Explanation. Classical economists view saving as a social virtue because flexible interest rates ensure saved funds are fully channelled into investment.
