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Outline the Key Aspects of Classical Monetary and Employment Theory, Paying Particular Attention To: a) Say's law, and b) The quantity theory of money.
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OUTLINE THE KEY ASPECTS OF CLASSICAL MONETARY AND EMPLOYMENT THEORY, PAYING PARTICULAR ATTENTION TO: A) SAY'S LAW B) THE QUANTITY THEORY OF MONEY The classical economists, such as, Adam Smith, David Ricardo, John Stuart Mill, Alfred Marshall and Arthur C. Pigou, believed that the economy possessed powerful self-correcting forces that guaranteed full employment and prevented actual real GDP (Y) from falling below natural real GDP (YN) for more than a short time. These forces consisted of flexible wages and prices, which would adjust rapidly to absorb the impact of shifts in aggregate demand. Their collective view was that the market mechanism would operate quickly and efficiently to restore full employment equilibrium. If the classical economic analysis was correct, then there would be no need for the government to engage in stabilisation policies. Monetarism emphasises the importance of the behaviour of the money stock in determining, firstly, the rate of inflation in the long...
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