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Chapter 9: Problem 1

What is the classical economics position on (a) wages, (b) prices, and (c) interest rates?

Short Answer

Expert verified
Classical economics posits that (a) wages are determined by the productive contribution of a worker, (b) prices are decided by the forces of supply and demand, and (c) interest rates are influenced by the balance between the demand and supply of loanable funds.

Step by step solution

01

Classical View on Wages

According to classical economic theory, wages—the price of labor—are derived from the productive contribution of a worker. Therefore, the wage of a labour should be equal to the value added by the last unit of labour employed. This principle is known as the marginal productivity theory of wages.
02

Classical View on Prices

In classical economics, prices are determined by the invisible forces of supply and demand without any intervention. The interaction between buyers and sellers in a competitive market leads to an equilibrium output and price. This principle is known as the law of supply and demand.
03

Classical View on Interest Rates

The classical theory of interest rates, also known as the loanable funds theory, suggests that interest rates are determined by the supply and demand for money. Interest rates rise when the demand for loanable funds exceeds the supply and fall when the supply of loanable funds exceeds the demand.

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Most popular questions from this chapter

What is the state of the labor market in (a) a recessionary gap, (b) an inflationary gap, (c) long-run equilibrium?

Describe the relationship of the (actual) unemployment rate to the natural unemployment rate in each of the following economic states: (a) a recessionary gap, (b) an inflationary gap, and \((\mathrm{c})\) long-run equilibrium.

Suppose that the economy is self-regulating, that the price level is 110 , that the quantity demanded of Real GDP is $$\$ 4$$ trillion, that the quantity supplied of Real GDP in the short run is $$\$ 4.9$$ trillion, and that the quantity supplied of Real GDP in the long run is $$\$ 4.1$$ trillion. Is the economy in short-run equilibrium? Will the price level in long-run equilibrium be greater than, less than, or equal to 4$110 ?$$ Explain your answers.

How do you explain why investment falls as the interest rate rises?

According to economists who believe in a self-regulating economy, what happens-step-by-step - when the economy is in a recessionary gap? What happens when the economy is in an inflationary gap?
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