Question

1. What is the main statement of Classical Economics regarding labor market?

1. What would that mean regarding the shape of the SRAS and the LRAS?
2. What does that mean regarding Monetary and Fiscal Policies?

Answer 1

A.

1. According to the classical economics the labor market is always at equilibirium because of the flexibility of the wage. This means even if supply of workers becomes more than what is demanded by the firms the wages will fall and keep the labor market equilibiruim. According to this theory the unemployement is considered as voluntary unemployment because the labors refuse to work at lower wage rate.
2. According to the classical thory talks about aggregate supply in the long run, hence the AS curve will be straight line, so when there is a recession the AS curve will not shift, the fall in price will self adjust to full employement in the long run, you can see this happening in the below graph where prices fall from P1 to P3 and adjust itself to full employement in the long run.
3. This means that according to this theory, the economy does not require any help of interfearence like fiscal and monetary policies to push the economy back to full employement. As we discussed in the previous question the economy will self adjust when the prices fall to full employement.