According to classical theory, national income depends on ______, while Keynes proposed that ______ determines the level of national income. a. aggregate demand; aggregate supply b. aggregate supply; aggregate demand c. monetary policy; fiscal policy d. fiscal policy; monetary policy

b. aggregate supply; aggregate demand

According to classical economic theory, national income is determined by the potential output of the economy, which is largely influenced by factors such as the availability of labor, technology, and capital. This is referred to as aggregate supply. The classical theory assumes that markets, including the labor market, are flexible and that prices and wages will adjust to ensure that any supply is met with corresponding demand, resulting in full employment.

In contrast, John Maynard Keynes challenged this view during the Great Depression when he saw persistent unemployment and output below the economy's potential. Keynes proposed that in the short run, the level of national income is determined not by the economy's potential output (aggregate supply), but by the aggregate demand for goods and services, which is the total spending by households, businesses, and the government. According to Keynesian theory, it's possible for aggregate demand to be insufficient, leading to less than full employment and a gap between what the economy can produce and what it is actually producing.