Chapter 16: Development of Economic Thinking

core principles of classical thinking

• laissez-faire

• free trade

• sound finance

• long-run equilibrium

laissez-faire

minimal government intervention in the economy, free markets are self-regulating and lead to efficient outcomes

free trade

unrestricted international trade benefits for all countries involved

sound finance

the government’s primary role is to maintain price stability, ensuring a stable financial environment for businesses to operate

long-run equilibrium

the economy naturally gravitates towards full employment equilibrium, with only frictional unemployment

Say’s Law

production generates income, which is then used to purchase goods and services, ensuring that aggregate supply and aggregate demand remains in balance

Equation of Exchange (MV = PY)

used by classic economists to argue that changes in the money supply only affect the price level, not real output

MV = PY

• M: Money supply

• V: velocity of money

• P: price level

• Y: real GDP

monetarist version of the long-run phillips curve