The Classical View self-correct is that the economy will to full employment, just at a higher price level. SRAS will shift to the left due to higher wages. No government action is required. In the theory is that Classical Thinking, “P-WAS”… the government should do nothing, and the economy will correct itself, but how does this happen? Through wages adjusting to prices. If “P-WAS”… prices rise, will rise which causes to shift WAGES AS toward LRAS, Or If prices fall, WAGES will “P-WAS” fall which causes AS to shift toward LRAS. 4C. Cost Push Inflation ( also has higher than normal unemployment) Note: This is mainly an Aggregate Supply problem, like high resource prices (oil). Fiscal Policy is less effective in this situation. The goal is to slow inflation first. The would raise interest rates to slow inflation. Classically “FED” speaking, workers would take lower wages to save their jobs and help move the AS from AS2 back to AS1 and QY as illustrated below.
The Classical View is that the economy will self-correct to full employment, just at a higher price level. SRAS will shift to the left due to higher wages. No government action is required. “P-WAS”… In Classical Thinking, the theory is that the government should do nothing, and the economy will correct itself, but how does this happen? Through wages adjusting to prices. “P-WAS”… If prices rise, WAGES will rise which causes AS to shift toward LRAS, Or “P-WAS” If prices fall, WAGES will fall which causes AS to shift toward LRAS. 4C. Cost Push Inflation ( also has higher than normal unemployment) Note: This is mainly an Aggregate Supply problem, like high resource prices (oil). Fiscal Policy is less effective in this situation. The goal is to slow inflation first. The “FED” would raise interest rates to slow inflation. Classically speaking, workers would take lower wages to save their jobs and help move the AS from AS2 back to AS1 and QY as illustrated below.
2018-2019_frsg_apmacrofreeresponsestudyguide.docx.docx