Classical Economics Model  

This is a model of the economy where it is assumed that prices, wages and interest rates are fully flexible so that markets will clear in the long run. Any disequilibrium in prices, wages and interest rates should be quickly resolved. Therefore, this model assumes that output will be determined by real variables such as the amount of capital and not monetary changes.

The classical model forms the basis of much of the Chicago School of Economics thinking.

Keynes was strongly critical of this classical model. He argued that wages, prices and interest rates may not change sufficiently due to rigidities such as trades unions and monopsony employers. Furthermore, he argued that the evidence of the Great Depression in the 1930s showed that Real Output could be below equilibrium levels for a long time.

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