The basic assumption of the Classical model that all price in the economy are pe

Question

The basic assumption of the Classical model that all price in the economy are perfectly One of the central tenets of the Classical model is which holds that supply creates its own demand. The Classical theorists advocated a policy allowing households and businesses to pursue their own self interest. Modern economists agree that the Classical model provides a good description of how the economy operates in the but it is also necessary to understand how the economy adjusts from a short-run equilibrium to a long-run equilibrium, where the economy is at According to the Classical model, if the economy is initially in long-run equilibrium, and a negative event causes the aggregate demand curve to shift to the left, business firms will experience sales, leading some to production and employment. Although the decrease in aggregate demand causes the economy to adjust to a new short-run equilibrium for which output is below full employment, this is a temporary situation. In the long run, assuming no action is taken by policy makers, wages will and the SRAS curve will shift to the until full employment is restored.

Explanation / Answer

The given image has 2 blank spaces to fill.

In the long run, assuming no action is taken by policymakers, wages will decline (since demand for labor will fall) and the SRAS curve will shift to the left (since production will fall) until full employment is restored.

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