Ch. 9

Classical View of Macroeconomics

  • Classical Economists (1750 - early 1900s)

  • Say’s Law: Supply creates its own demand.

  • Savings equal investment: extSavings=extInvestmentext{Savings} = ext{Investment}.

Price and Wage Flexibility

  • Prices and wages are flexible.

  • Markets are competitive; supply and demand operate uniformly.

  • Temporary labor market surpluses/shortages; economy self-corrects.

States of the Economy

  • Recessionary Gap: Real GDP < Natural Real GDP; high unemployment.

  • Inflationary Gap: Real GDP > Natural Real GDP; low unemployment, inflation pressure.

  • Long Run Equilibrium: Real GDP = Natural GDP; full employment.

Self-Regulating Economy

  • In recessionary gaps: high unemployment leads to wage decreases, economy self-corrects.

  • Slow recovery tied to wage adjustment speed; slower wage adjustment means slower recovery.

  • In inflationary gaps: low unemployment drives wages up, economy returns to equilibrium.

Policy Implications

  • Laissez-Faire: Non-interference in market activities; economy moves to natural GDP level.

  • Self-regulating economy is characterized by flexible prices and wages, leading to full employment.

Overall Conclusions

  • Classical macroeconomics emphasizes self-regulation, Say's Law, flexible wages/prices, and the normalcy of full employment and natural GDP.