Question

Explain how the interest rate works in the classical System to stabilize aggregate demand in the face of autonomous changes in components of aggregate demand such as investment or government spending.​

Answer 1

Answer:

The increase/decrease of the interest rate in the classical system tends to lower/higher economic activity, and as a result decrease/increase in aggregate demand.

Answer 2

$\sf \blue {\underbrace{\underline{Elucidation:-}}}$

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➻ Classical economics emphasises the fact that free markets lead to an efficient outcome and are self-regulating.

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➻In classical economic theory,the interest rate consists of the return to hold bond and the cost of borrowing and therefore it is dependend on level of bond supply and bond demand.

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➻In this system bond is supplied by both firms and government. Where firm sells bond to finance the investment expenditure while on the other hand government sells bond to finance spending in excess of tax resources.

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➻Old style financial matters accentuates the way that unregulated economies lead to an effective result and are automatic.

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