Answer to Question #99923 in Macroeconomics for fatima

Question

what are major policy conclusions of classical economics?

explain how these policy conclusions follow from the key assumptions of the classical theoretical system

Answer 1

A1. Classical economics emphasises the fact that free markets lead to an efficient outcome and are self-regulating.

A2.   In macroeconomics, classical economics assumes the long run aggregate supply curve is inelastic; therefore, any deviation from full employment will only be temporary.

B1. The Classical view is that Long Run Aggregate Supply (LRAS) is inelastic. This has important implications. The classical view suggests that real GDP is determined by supply-side factors – the level of investment, the level of capital and the productivity of labor. Classical economists suggest that in the long-term, an increase in aggregate demand will just cause inflation and will not increase real GDP.

B2. In the classical model, there is an assumption that prices and wages are flexible, and in the long-term markets will be efficient and clear. For example, suppose there was a fall in aggregate demand, in the classical model this fall in demand for labor would cause a fall in wages. This decline in wages would ensure that full employment was maintained and markets ‘clear’.