Q.State which of the following statements are true or false. Give valid reasons.

Statement (a): False

The Keynesian theory explicitly rejects the classical claim that equilibrium automatically occurs at full employment. Keynes argued that an economy can settle into equilibrium at any level of employment — including situations with involuntary unemployment. Equilibrium is reached when aggregate demand equals aggregate supply (or equivalently, when planned investment equals planned saving), but nothing guarantees that this equilibrium corresponds to full employment of all resources. …

(a) Keynesian equilibrium and full employment

The statement confuses equilibrium with full employment, which is a fundamental misunderstanding of Keynesian economics.

In Keynesian theory, equilibrium occurs when aggregate demand (AD) equals aggregate supply (AS), or equivalently when planned expenditure equals national income. This is the condition for the economy to be at rest — no unintended inventory accumulation or depletion, no pressure for output to change. The equilibrium condition in a simple two-sector model is:

where $Y$ is income, $C$ is consumption, and $I$ is investment.

Now here's the crucial insight: this equilibrium can occur at any level of output. The economy settles where aggregate demand happens to intersect the 45° line (income = expenditure), and there is no automatic mechanism that guarantees this intersection will be at full employment. If aggregate demand is weak — say, because investment is low or consumption is depressed — equilibrium will be reached at a level of income below full employment. Workers want jobs, firms have idle capacity, but there is simply not enough spending in the economy to justify hiring them.

This is precisely Keynes's revolutionary point. Classical economists believed the economy would always self-correct to full employment through wage and price adjustments. Keynes argued that the economy could get stuck in an underemployment equilibrium — a stable situation with persistent unemployment. The state of full employment is a special case, not a general feature of equilibrium.

Statement (a) is false. According to Keynesian theory, equilibrium is obtained when aggregate demand equals aggregate supply, but this can happen at less than full employment, at full employment, or even (theoretically) beyond full employment. Full employment is not a prerequisite for equilibrium; it is one possible outcome among many.

(b) Consumption equals income in a two-sector economy

This statement is straightforward once we recall the definitions.

In a two-sector economy (households and firms, no government or foreign trade), income can be used in only two ways: consumption or saving. The accounting identity is: