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Classical economists assumed that wage rates, prices, and interest rates are flexible and will adjust quickly. Consider an extreme case: Suppose classical economists believed that wage rates, prices, and interest rates would adjust instantaneously. What would the classical aggregate supply ( AS ) curve look like? Explain your answer.
Macroeconomics
Solutions
Macroeconomics
Classical economists assumed that wage rates, prices, and interest rates are flexible and will adjust quickly. Consider an extreme case: Suppose classical economists believed that wage rates, prices, and interest rates would adjust instantaneously. What would the classical aggregate supply (AS) curve look like? Explain your answer.
The instantaneous adjustment of prices and wages and the classical AS curve.
Explanation of Solution
According to the classical economists, the economy is always self-regulating and does not need any intervention of the government to control its activities other than providing military support. Thus, they demand Laissez-Faire economy where the economic transactions of the economy are free from the government regulations, tariffs, and interventions.
When this assumption turns out to be true and the interest rate of the economy adjusts instantaneously, the aggregate supply curve of the economy will most probably would be a vertical straight line...
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