Explain briefly classical theory of income and employment. How does this theory show that free market economy automatically adjusts to fully employment level?
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Answer:The basic contention of classical economists was that “given flexible wages and prices, a competitive market economy would operate at full employment. That is, economic forces would always be generated to ensure that the demand for labour would always equal its supply”.
Disturbances of given flexible wages and prices that caused investment or saving curves to shift, or shifts in demand and supply curves in any other market, adjustments in wages, prices and the interest rate would always return the economy to a position of full employment equilibrium
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