The classical model uses the assumption that
A. all wages and prices are flexible.
B. economic markets are fragile and have no tendency to move towards an equilibrium.
C. interest rates are not flexible.
D. monopoly is widespread in the economy.
Answer: A. all wages and prices are flexible.
Under classic model the assumption was that all wages and prices are flexible as a result of which any policy change will not lead to affect output and is only checked by change in prices.
In case of unemployment a ganeral cut in money wages can take economy straight to full employment level, like when money wages are reduced cost of roduction decreases means prices will fall this will increase demand and thus output will increased and will reach full employment level.
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