Classical Economic Views

1. Vertical Aggregate Supply Curve

  • The aggregate supply curve is at the level of full-employment

  • Economy will operate at full employment for two reasons

a. Say's law - supply will create its own demand

b. Responsive, flexible prices and wages

  • Because firms can easily alter wages, they can change input costs to keep real profits the same at any price level.

2. Stable Aggregate Demand.  This depends on:

1. the quantity of money households and businesses possess

a. Classical economists argue that aggregate demand will be stable if constant supply of money

  • increases in money supply shift aggregate demand rightward, causing demand pull inflation

  • decreases in money supply shift aggregate demand leftward, causing deflation

2. the real value of money  


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