Question

A)Classical theory at its crux is the one belief that prices, wages and interest-rates are at equilibrium in the long run, all on their own. How come they’re all lumped together in this way? Answer:

B) Explain which philosophy is supply-sided, and which one is demand-sided. Answer:

Answer 1

A) Classicals believe that in the long run there will always be full employment in the economy . In short run unemployment may exist due to market anomalies and price , wage stickiness but in long run price , wage , interest are all flexible and adjust on their own to reach full employment . Classical economists advocate the effect of invisible hand or forces of supply and demand that brings market in equilibrium .

Classical economists believe that when savings is greater than investment , interest rates will fall , so that investors start to demand more of available savings .  Hence, an increase in savings will lead to an increase in investment expenditures through a reduction of the interest rate, and the economy will always return to the natural level of real GDP. The flexibility of the interest rate as well as other prices acts as the self‐adjusting mechanism of the classical theory that keeps the real GDP always at its natural level.

Similarly, flexibility of the wage rate keeps the labor market in equilibrium all the time. Classicals only believe in voluntary unemployment , not any market caused unemployment in long run .