The basic assumption of the Classical model that all price in the economy are pe

Question

The basic assumption of the Classical model that all price in the economy are perfectly One of the central tenets of the Classical model is which holds that supply creates its own demand. The Classical theorists advocated a policy allowing households and businesses to pursue their own self interest. Modern economists agree that the Classical model provides a good description of how the economy operates in the but it is also necessary to understand how the economy adjusts from a short-run equilibrium to a long-run equilibrium, where the economy is at According to the Classical model, if the economy is initially in long-run equilibrium, and a negative event causes the aggregate demand curve to shift to the left, business firms will experience sales, leading some to production and employment. Although the decrease in aggregate demand causes the economy to adjust to a new short-run equilibrium for which output is below full employment, this is a temporary situation. In the long run, assuming no action is taken by policy makers, wages will and the SRAS curve will shift to the until full employment is restored.

Explanation / Answer

1.

Adam Smith                           

(Adam Smith wrote this book as mentioned in the question)

2.

Perfectly Flexible / elastic      

(Prices are assumed to be perfectly flexible as per classical economic theory)

3.

Say’s Law                              

(It says that supply creates its own demand)

4.

Nonintervention Policy          

(Classical theory proposes that economy will adjust and cure the issues automatically without the intervention of the government)

5.

Short term                              

(Behavior of economy in short term is well explained by the classical theory)

6.

Above or below the natural level of employment

There is a difference between employment and natural level of employment for economy when it moves from short term to long term)

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