Essay Title: 

Classical Economics

March 24, 2016 | Author: | Posted in economics, mathematics and economics

When the demand for labour rose or fell wages would also rise or fall to keep the workforce at full employment

The effect of interest rates on state and local governments ‘ capital goods purchases is uncertain so the negative effect of interest rates on this component of expenditure is based on the ceteris paribus assumption . However , in the classical economics the interest rate will keep government spending in check and create equilibrium in aggregate demand

The up and down movement of exchange rate will nevertheless cause stability even in the face [banner_entry_middle]

of autonomous changes in the components of aggregate demand like government spending . Higher interest rate may require government to spend more while a lower interest rate will urge government to spend less . This way stability is maintained in aggregate demand

An increase in government spending will shift the IS schedule to the right income and the interest rate will both rise . The increase in government spending stimulates aggregate demand , both directly and through an induced effect on consumption . The interest rate rises because of the increase in money demand as income rises

An autonomous decline in investment spending will shift the IS schedule to the left income and the interest rate will both fall . With an autonomous drop in investment , aggregate demand falls , pushing income down . With the drop in income , money demand falls and so does the interest rate

3 . What are the major policy conclusions of classical economics ? Explain how these policy conclusions follow from the key assumptions of the classical theoretical system

The classical theory of aggregate demand is an implicit theory derived from the quantity theory of money . With a fixed velocity , or value of the Cambridge k , a given value of the money stock (M ) determines the aggregate monetary demand for goods (PY . In… [banner_entry_footer]

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