Chapter 9: Problem 2

According to classical economists, does Say's law hold in a money economy? Explain your answer.

Short Answer

Expert verified

According to classical economists, Say's law does indeed hold in a money economy. They believed that money is merely a medium of exchange and that income generated from production would eventually be used to purchase other goods and services, thus validating Say's Law.

Step by step solution

Understanding Say’s Law

Say's law is an economic theory that states that production creates its own demand. The basic idea is that the income which is generated through production will be used to purchase other goods and services. Thus, creating a product creates the demand for other products by providing individuals the means with which to purchase them.

Identifying Classical Economists’ Views

Classical economists, like John Stuart Mill and Adam Smith, held the view that Say's law generally holds true in an economy. That means, according to them, supply creates its own demand and hence, there shouldn't be any general gluts (demand shortfall) in the economy.

Applying it to a Money Economy

In a money economy, classical economists believed that money is just a medium of exchange and does not interrupt the basic logic of Say’s law. They argued that any money received from selling goods or services would eventually be used to buy other goods or services. Therefore, according to classical economists, Say's Law holds in a money economy.

Evaluating Possible Exceptions

While classical economists generally agreed with Say’s law, they acknowledged that there could be temporary mismatches between supply and demand due to disruptions, leading to surplus or deficit of certain goods. However, they believed that these are temporary issues and market mechanisms would resolve them in the long run.

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