Chapter 11 Terms 101 - The Classical Model: This model,...

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The Classical Model: This model, which traces its origins to the 1770s, was the first systematic attempt to explain the determinants of the price level and the national levels of output, income, employment, consumption, saving and investment. Assumptions of the Classical Model: Supply creates its own demand, or desired expenditures will equal actual expenditures. There are four major assumptions: 1. Pure Competition Exists: No single buyer or seller of a commodity or an input can affect its price. 2. Wages and Prices Are Flexible: Prices, wages, and interest rates are free to move to the level dictated by supply and demand in the long-run. 3. People Are Motivated by Self-Interest: There is an underlying assumption that businesses want to maximize their profits and households want to maximize their economic well– being. 4. People Cannot Be Fooled by Money Illusion: Buyers and sellers react to changes in relative prices. Say’s Law:
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Chapter 11 Terms 101 - The Classical Model: This model,...

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