Question

According to classical theory the economy is almost always at

Answer 1

The fundamental principle of the classical theory is that the economy is self‐regulating. Classical economists maintain that the economy is alwayscapable of achieving the natural level of real GDP or output, which is the level of real GDP that is obtained when the economy's resources are fully employed.

Answer 2

➡️According to Say's Law, when an economy produces a certain level of real GDP, it also generates the income needed to purchase that level of real GDP. In other words, the economy is always capable of demanding all of the output that its workers and firms choose to produce. Hence, the economy is always capable of achieving the natural level of real GDP.

➡️The fundamental principle of theclassical theory is that the economy is self‐regulating. Classical economists maintain that the economy is alwayscapable of achieving the natural level of real GDP or output, which is the level of real GDP that is obtained when theeconomy's resources are fully employed.

➡️The achievement of the natural level of real GDP is not as simple as Say's Law would seem to suggest. While it is true that the income obtained from producing a certain level of real GDP must be sufficient to purchase that level of real GDP, there is no guarantee that all of this income will be spent. Some of this income will be saved. Income that is saved is not used to purchase consumption goods and services, implying that the demand for these goods and services will be less than the supply. If aggregate demand falls below aggregate supply due to aggregate saving, suppliers will cut back on their production and reduce the number of resources that they employ. When employment of the economy's resources falls below the full employment level, the equilibrium level of real GDP also falls below its natural level. Consequently, the economy may not achieve the natural level of real GDP if there is aggregate saving. The classical theorists' response is that the funds from aggregate saving are eventually borrowed and turned into investment expenditures, which are a component of real GDP. Hence, aggregate saving need not lead to a reduction in real GDP.