Chapter 9 Classical Economics Flashcards
What does any macroeconomics theory need to explain
Why recession and unemployment occur
Why inflation occurs
How economies grow over time
Macroeconomics studies the economy as a
Whole
Aggregate means
Total
Aggregate demand
Total expenditure and income in the economy
Aggregate supply
Total production in the economy
When will Equilibrium occur
Then aggregate demand and aggregate supply are equal. That is where total planned expenditure by consumers equals total production by businesses .
Components of aggregate demand
Consumption and savings Investment Government spending and taxes Exports and imports ( spending) Money supply
Components of aggregate supply
Cost of production
Productivity
technology
supply shocks
Macroeconomics theories tend to be based on
Either aggregate supply or aggregate demand, but not both
Microeconomics theories depend on the
Behavior of individuals and behavior of businesses
Classical economics argue that the only cause of inflation is
Unwarranted increase in the supply of money
Classical economics started
In the late 1700s, was developed through out the 1800’s and was the dominant macro economic theory until the Great Depression of the 1930s.
In the classical world, savings and investment are always
Equal, equilibrated by changes in interest rate
Say’s Law
States that all goods produced will be purchased [supply creates its own demand].
This happens because of the equality of savings and investment which balances out any changes in consumption spending that occur . Consumption is the determined as the remainder after the level of savings is determined.
Because the country will have a large and growing population,
The labor force will be large and there will always be competition for jobs.
The competitive labor market creates an environment where
Wages are highly flexible and can change virtually instantaneously.
Classical dichotomy
Classical economists believe that Real and nominal variables are independent of each other.
a recession in the classical world will end quickly because
Wages will fall, SRAS will shift to the right, prices will fall and equilibrium will be restored.
Inflationary gap
Inflationary gap will end in the classical world because wages will rise, SRAS will shift to the right, prices will rise, and equilibrium will be restored.
Classical economists believe that recession will not occur if
Wages and prices are flexible
