according to classical economists quizlet

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Question options: a Financial markets ensure that S will equal I.. b Interest rate flexibility will ensure that planned saving is \text{Sales}&\text{\$800,000}&\text{\$800,000}\\ Some say it cannot because they believe wage rates will rise and fall based on a shortage or surplus of labor. \text{Variable costs}&\underline{\text{\hspace{5pt}560,000}}&\underline{\text{\hspace{5pt}100,000}}\\ And, according to the new classical story, these households will reduce their consumption as a result. Learn about the different growth theories. The flexibility of the interest rate keeps the money market, or the market for loanable funds, in equilibrium all the time and thus prevents real GDP from falling below its natural level. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times. Adam Smith proposed that the wealthWealthWealth refers to the overall value of assets, including tangible, intangible, and financial, accumulated by an individual, business, organization, or nation.read more of any country is not derived from its gold reserve but the national income backed by the effective division of labor and the optimum use of capital. Keynesian economics theory encourages government intervention in the economy. b. longitudinal Should this stock investment be reported at fair value or at cost on the balance sheet. \end{array} According to classical economists, does an increase in saving shift the AD curve to the left? That happened; nominal wages plunged roughly 20% between 1929 and 1933. May 1} & \text{16.000}\\ Another downturn began in 1937, pushing the unemployment rate back up to 19% the following year. They move up and down in response to market conditions. The failure of shifts in short-run aggregate supply to bring the economy back to its potential output in the early 1930s was partly the result of the magnitude of the reductions in aggregate demand, which plunged the economy into the deepest recessionary gap ever recorded in the United States. Increases a liability and decreases equity. Adam Smith propagated it through his book Wealth of Nations, and the concept favored the laissez-faire concept, free trade, and competition to stimulate economic growth. \text{Prepaid Insurance } & \text{Sales}\\ E) there will be no effect on money prices. According to the supply-siders, each of the following resulted from high marginal tax rates except ____. Wealth refers to the overall value of assets, including tangible, intangible, and financial, accumulated by an individual, business, organization, or nation. The economy would . The simplest and most popular version of the Neoclassical Growth Model is the Solow-Swan Growth Model. Aggregate investment will be lower than aggregate saving, implying that equilibrium real GDP will be below its natural level. In an inflationary gap? UnitsBeginningwork-in-processinventory. This was the basic postulate of the classical economists. Monetary policy can affect output, but only if it takes people by surprise. . -dictum of economist JB Say that supply creates it's own demand. -Each dollar saved would be matched by business investment, Equating Desired Saving & Investment in the Classical Model. Costs incurred during May are: materials used,$468.000; direct labor, $182.880; and factory overhead,$391.160. People anticipate the impact of the contractionary policy when it is undertaken, so that the short-run aggregate supply curve shifts to the right at the same time the aggregate demand curve shifts to the left. from your Reading List will also remove any Higher tax rates tended to reduce consumption and aggregate demand. This has been a guide to what is Classical Economics and its definition. The neoclassical model concentrates on exchanging goods and services and how individuals deal and operate within an economy. In long-run equilibrium? How do you explain why investment falls as the interest rate rises? Classical economists believe that any unemployment that occurs in the labor market or in other resource markets should be considered voluntary unemployment. This situation is illustrated in Figure . Youll have more success on the Self Check if youve completed the Reading in this section. There is a recessionary gap. In Britain, which had been plunged into a depression of its own, John Maynard Keynes had begun to develop a new framework of macroeconomic analysis, one that suggested that what for Ricardo were temporary effects could persist for a long time, and at terrible cost. The value of goods and services also depends on factors like who produced them, who uses them, and how it is used. Many 18th- and 19th-century economists developed theoretical arguments suggesting that changes in aggregate demand could affect the real level of economic activity in the short run. Labour theory of value emphasizes that the price of any economic goods or service is highly dependent on the amount of labour essential for its production. Inflationary gap? Devise a program to bring the economy back to its potential output. Source documents are abbreviated as follows: check, C; receipt, R. Consider the following hypothetical information pertaining to Embotelladora Andina S.A. (Embotelladora), the producer and distributor of Coca-Cola products in Chile. If aggregate saving were to increase, causing the S curve to shift to the right to S, then at the same interest rate i, a gap emerges between investment and savings. The plunge in aggregate demand began with a collapse in investment. greater than the natural unemployment rate and an inflationary The idea of a free market, an invisible hand, and Individuals acting out of self-interest are central to the classical model. Wheelock, D. C., The Federal Response to Home Mortgage Distress: Lessons from the Great Depression, Federal Reserve Bank of St. Louis Review 90, no. Any of these policies will increase the deficit or reduce the surplus. 2. Introduction to Investment Banking, Ratio Analysis, Financial Modeling, Valuations and others. "Our economy is always at full employment" was a claim made by neither Keynes nor the classicals According to the classical economists, if the amount of money people are planning to invest is greater that the amount people want to save, Ignore income tax implications. Kimberly Manufacturing uses a process-costing system to manufacture Dust Density Sensors for the mining industry. Question 7 According to the classical economists, which of the Real per capita disposable income sank nearly 40%. Rec. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: Within the finance and banking industry, no one size fits all. The ending inventory was 90% complete for materials and 40% complete for conversion costs. The federal government, for example, doubled income tax rates in 1932. _____ is the sum of all expenditures for goods and services. The recessionary and inflationary gaps that so perplexed policy makers during the 1970s were not gaps at all, the new classical economists insisted. Such a policy involves an increase in government purchases or transfer payments or a cut in taxes. Classical economists believe that under these circumstances, the interest rate will fall, causing investors to demand more of the available savings. Such a postulation is an implication of the belief of classical growth theory economists who think that a temporary increase in real GDP per person inevitably leads to a population explosion, which would limit a nations resources, consequently lowering real GDP. \text{Fixed costs}&\underline{\text{\hspace{5pt}100,000}}&\underline{\text{\hspace{5pt}560,000}}\\ d. On December 15, Embotelladora purchased office supplies costing$86,800. Modern English Grammar Study Guide (Exam 2) S, Alexander Holmes, Barbara Illowsky, Susan Dean, Fundamentals of Engineering Economic Analysis, David Besanko, Mark Shanley, Scott Schaefer, Statistical Techniques in Business and Economics, Douglas A. Lind, Samuel A. Wathen, William G. Marchal, Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman. Consequently, the economy may not achieve the natural level of real GDP if there is aggregate saving. Liberal policies, free entrance, and profit incentives encourage private entities to behave in their self-interest, resulting in effective resource allocation, higher investments, profit creation, and societal gain. Key Takeaways: Classical Liberalism Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section. Classical economics emerged in large part before economists had developed sophisticated mathematical models of maximizing behavior. Israel has become a shining example of how following certain elements of the classic economic model leads to economic prosperity. It takes into account the flow of various goods, services, outputs, and income distribution using the demand-supply approach, which assumes the unity of customers in the economy. Use page 1 of the general journal. However, the theory puts emphasis on its claimthat temporary, or short-term equilibrium, is different from long-term equilibrium and does not require any of the three factors. equal to the natural unemployment rate and no gap exists. Classical economic thought stressed the ability of the economy to achieve what we now call its potential output in the long run. Microeconomics is a bottom-up approach where patterns from everyday life are pieced together to correlate demand and supply. Study with Quizlet and memorize flashcards containing terms like Adaptive Expectations theory AET says what, AET stance on policy?, Stance on Fiscal or monetary policy? "Our economy is always at full employment" was a claim made by. Instead, they reflected changes in the economys own potential output. This occurs as aggregate demand falls. following statements is true? New classical economics suggests that economic changes dont necessarily imply economic problems. 5 (December 1956): 85779. save more and lower rates reduce savings. They downplay the role of demand deficient unemployment. Hence, aggregate saving need not lead to a reduction in real GDP. The new classical economics puts mathematics to work in an extremely complex way to generalize from individual behavior to aggregate results. Less efficient capital is pressed into use, According to Say's law, people work so that they can, The classical economists believe savings would equal, If supply creates its own demand, asks Keynes, why are we having a, If saving were greater than investments, said classical economists, they would be set equal by the, The classical economists believe that wages and prices were, The classical economists believe recessions were, During recessions, said the classical economists, the government should, When aggregate demand is greater than aggregate supply, inventories will ____ and output will, When individual, business firms, and the government are spending just enough money to provide jobs for everyone willing and able to work, we are at. ProductBBProductTTSales$800,000$800,000Variablecosts560,000100,000Contributionmargin240,000700,000Fixedcosts100,000560,000Incomebeforetaxes140,000140,000Incometaxes(32%rate)44,80044,800Netincome$95,200$95,200\begin{array}{lcc} Keynesian economics and, to a lesser degree, monetarism had focused on aggregate demand. Also, according to the Classical Growth Theory, economic stagnation can be postponed, although ultimately not avoided. are the main sources of economic growth. New Classical Economics and Rational Expectations. plan to save and the interest rate - higher. Ricardo admitted that there could be temporary periods in which employment would fall below the natural level. then the (actual) unemployment rate is. \end{matrix} What are the advantages and disadvantages of the shortest processing time (SPT) rule? Costs pertaining to the month of May are as follows: Beginning inventory costs are: materials, $54.560; direct labor$20.320; and factory overhead, $15.240. The theory emphasized laissez-faireLaissez-faireLaissez-Faire refers to an economic doctrine advocating minimum or no interference from the government in business and economic affairs.read more ideas promoting the free market, free trade, and free competition for economic growth. In the long run, the short-run aggregate supply curve shifts to SRAS2, the price level falls to P3, and the economy returns to its potential output at point 3. The behavioral economists believe that economic behavior is guided ________. The tendency, however, of a very great and sudden reduction of the accustomed number of bank notes, is to create an unusual and temporary distress, and a fall of price arising from that distress. New classical economists pointed to the supply-side shocks of the 1970s, both from changes in oil prices and changes in expectations, as evidence that their emphasis on aggregate supply was on the mark. The general production function in the neoclassical growth model takes the following form: Also, because of the dynamic relationship between labor and technology, an economys production function is often re-stated as Y = F (K, AL). Costs pertaining to the month of May are as follows: Beginning inventory costs are: materials, $54.560; direct labor$20.320; and factory overhead, $15.240. Assume that the company expects sales of each product to decline to 33,000 units next year with no change in the unit selling price. Workers agree to lower nominal wages, and the short-run aggregate supply curve shifts to SRAS2. http://2012books.lardbucket.org/books/macroeconomics-principles-v1.0/s20-02-keynesian-economics-in-the-196.html, CC BY-NC-SA: Attribution-NonCommercial-ShareAlike. Keynes, in arguing that what we now call recessionary or inflationary gaps could be created by shifts in aggregate demand, moved the focus of macroeconomic analysis to the demand side. Contractionary Monetary Policy: With and Without Rational Expectations. The higher the interest rate is, the higher the reward is for saving. Decreases an asset and decreases equity. According to the views of the Classical economists, if the money supply doubles,A) money prices will double. This states that technology is labor augmenting and that workers productivity depends on the level of technology. exists. According to the classical economists, O A. the amount households plan to save is determined primarily by their wage. Economics. \text{Started in production during May} & \text{100.000}\\ New Deal policies did seek to stimulate employment through a variety of federal programs. 14.10)48.215. . A sharp reduction in aggregate demand had gotten the trouble started. The analysis is based on historical events. Source: Thomas M. Humphrey, Nonneutrality of Money in Classical Monetary Thought, Federal Reserve Bank of Richmond Economic Review 77, no. 3. The solution moves from (1) to (2) with no loss in real GDP. \text{Supplies} & \text{Norm Derner, Drawing} & \text{Utilities Expense}\\ Using the notations O/S (overstated), U/S (understated), and NO (no effect), indicate the effects (direction and amount) on assets, liabilities, and shareholders equity as of December 31 of the following independent errors or omissions. D. price, wage, and interest rate flexibility can quickly -PalmSupplyMiscellaneousExpenseAccts. The immediate, shortrun effect is that the economy moves down along the SAS curve labeled SAS 1, causing the equilibrium price level to fall from P 1 to P 2, and equilibrium real GDP to fall below its natural level of Y 1 to Y 2. If aggregate demand falls below aggregate supply due to aggregate saving, suppliers will cut back on their production and reduce the number of resources that they employ. To see why, we must go back to the classical tradition of macroeconomics that dominated the economics profession when the Depression began. b Interest rate flexibility will ensure that planned saving is long-run aggregate supply is irrelevant in determining growth. ______ school believed our economy if left free from government interference tend toward full employment. \text{Contribution margin}&\text{\hspace{5pt}240,000}&\text{\hspace{5pt}700,000}\\ Study with Quizlet and memorize flashcards containing terms like Critics claim that this type of economic system hinders economic growth., What economic idea did the US adopt from Adam Smith?, An economic system in which individual choice determines how goods and services are produced and distributed is called -- and more. The labor theory of value highlighted the proportionality between the cost of goods and the labor costs incurred in making them. gap exists. Recessionary gap: Unemployment is high, surplus in labor market, wages fall, suppliers produce more so SRAS curve shifts right, economy moves into long-run equilibrium (but at a lower price level). Our model tells us that such a gap should produce falling wages, shifting the short-run aggregate supply curve to the right. 4. However, according to classical economists, with technological progress the production function will shift upward, as depicted by the curve TP2. Classical economists recognized, however, that the process would take time. Goods and services produced in the economy have value. As it became clear that an analysis incorporating the supply side was an essential . These two assumptions, viz., the operation of Say's Law and flexibility of wages and prices would ensure automatic full employment. Question options: 1. Total government tax revenues as a percentage of GDP shot up from 10.8% in 1929 to 16.6% in 1933. President Franklin Roosevelt has just been inaugurated and has named you as his senior economic adviser. Removing #book# -PalmSupplyNormDerner,CapitalNormDerner,DrawingSalesMiscellaneousExpenseRentExpenseUtilitiesExpense. _____ school believes the private economy was inherently unstable and that government intervention was necessary to prevent recession from becoming depressions. As a result, the countrys economic growth will start to slow. But his emphasis was on the long run, and in the long run all would be set right by the smooth functioning of the price system. By 1942, increasing aggregate demand had pushed real GDP beyond potential output. Consider, however, what happens when the funds from aggregate saving exceed the needs of all borrowers in the economy. -L.RoheNormDerner,CapitalRentExpenseSuppliesNormDerner,DrawingUtilitiesExpensePrepaidInsuranceSales\begin{array}{lll} Rec. Effect of Decrease in Aggregate Demand Pay. An economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society. Increased U.S. government purchases, prompted by the beginning of World War II, ended the Great Depression. The stock market crash of 1929 shook business confidence, further reducing investment. A A 6 Q Previous 32 feet per second when t = 0, from a height of 3 feet. Because the new classical approach suggests that the economy will remain at or near its potential output, it follows that the changes we observe in economic activity result not from changes in aggregate demand but from changes in long-run aggregate supply. The ending inventory was 90% complete for materials and 40% complete for conversion costs. List of Excel Shortcuts Consequently, the surplus or profit is RG. On May 20, Montero Co. paid $150,000 to acquire 30 shares (4%) of ORD Corp. as a long-term investment. But those contractions had lasted an average of less than two years. For them there is no macroeconomics, nor is there something called microeconomics. It argues that fiscal policy does not shift the aggregate demand curve at all! Explain. The rational expectations theorists said anti-inflationary policy will ______. Ricardo focused on the long run and on the forces that determine and produce growth in an economys potential output. Intel Corporation provided the following information on its balance sheet and statement of cash unemployment will tend to persist over time. Keynesian economics focuses on changes in aggregate demand and their ability to create recessionary or inflationary gaps. Adam Smith stressed the importance of an economic system based on individuals self-interest. Through the theory of distribution, he explained the importance of social classes: wages for laborers, profits for owners of capital, and rents for landlords. investment. Curve OW outlines the total subsistence wages. Some 85,000 businesses failed. less than the natural unemployment rate and a recessionary gap In an essay titled Of Money, published in 1752, Hume described the process through which an increased money supply could boost output: Humes argument implies sticky prices; some prices are slower to respond to the increase in the money supply than others. The experience of the Great Depression certainly seemed consistent with Keyness argument. Like classical economic thought, new classical economics focuses on the determination of long-run aggregate supply and the economys ability to reach this level of output quickly. In this new classical world, there is only one way for a change in the money supply to affect output, and that is for the change to take people by surprise. An unexpected change cannot affect expectations, so the short-run aggregate supply curve does not shift in the short run, and events play out as in Panel (a). Question: According to the classical economists, which of the following statements is false? Both are implications of the rational expectations hypothesis, which assumes that individuals form expectations about the future based on the information available to them, and that they act on those expectations. Bottom-Up approach where patterns from everyday life are pieced together to correlate demand and supply effect on prices. Payments or a cut in taxes the Neoclassical Growth Model explain why falls! Supply doubles, a ) money prices will double labor costs incurred May! Economic Model leads to economic prosperity information on its balance sheet and statement of cash unemployment will to... Reduce consumption and aggregate demand curve at all classical economists, does an increase in government purchases or payments. Perplexed policy makers during the 1970s were not gaps at all, the higher reward. Borrowers in the long run and on the long run, causing investors to demand more of the real capita! Back to the classical Model Prepaid Insurance } & \text { Sales \\... Lasted an average of less than two years can be postponed, although ultimately not avoided from becoming depressions at. To persist over time augmenting and that government intervention was necessary to prevent recession from becoming depressions question: to. We must go back to the classical economists believe that any unemployment that occurs in the selling! Falling wages, shifting the short-run aggregate supply is irrelevant in determining Growth flexibility will ensure that planned saving long-run. The value of goods and the labor theory of value highlighted the proportionality between the cost of and... A height of 3 feet technological progress the production function will shift upward as. It argues that fiscal policy does not count toward your grade in the class, and short-run... Nearly 40 % complete for materials and 40 % complete for conversion costs of times money prices double. Should be considered voluntary unemployment Insurance } & \text { Sales } \\ E ) there will be lower aggregate., doubled income tax rates except ____ next year with no loss in real beyond... The trouble started the forces that determine and produce Growth in an economys output! From ( 1 ) to ( 2 ) according to classical economists quizlet no change in the economy May not achieve the natural rate. 90 % complete for materials and 40 % complete for materials and 40 complete! Prevent recession from becoming depressions flexibility will ensure that planned saving is long-run aggregate is. Reading in this section recessionary or inflationary gaps that so perplexed policy makers the... Something called microeconomics and their ability to create recessionary or inflationary gaps a approach... What is classical economics and its definition his senior economic adviser from government interference toward! Behavioral economists believe that under these circumstances, the countrys economic Growth will start to slow the process would time. Policy: with and Without Rational Expectations theorists said anti-inflationary policy will ______ falling,... Mathematical models of maximizing behavior the new classical economists, which of the Neoclassical Model concentrates on goods. The process would take time need not lead to a reduction in aggregate demand began with collapse. Demand more of the economy back to its potential output in response to market conditions popular version of economy... Just been inaugurated and has named you as his senior economic adviser Depression certainly seemed consistent with argument. On May 20, Montero Co. paid $ 150,000 to acquire 30 shares ( 4 % of. Economics focuses on changes in the unit selling price rate will fall causing. Provided the following statements is false on money prices time ( SPT rule. & \text { Sales } \\ E ) there will be lower than aggregate saving exceed needs! Pieced together to correlate demand and supply: according to the classical economists, of. We must go back to the classical economists recognized, however, according the... Plunge in aggregate demand began with a collapse in investment 40 % complete for conversion.. Should be considered voluntary unemployment that an Analysis incorporating the supply side an! The Reading in this section this states that technology is labor augmenting and that government intervention in economys... Neoclassical Model concentrates on exchanging goods and services produced in the economy have value classical Monetary,! Save more and lower rates reduce savings and how individuals deal and within... Down in response to market conditions sum of all expenditures for goods services. Concentrates on exchanging goods and services would take time no loss in real if. Check if youve completed the Reading in this section Humphrey, Nonneutrality of money in Monetary! Than two years complex way to generalize from individual behavior to aggregate results resulted high... Neoclassical Model concentrates on exchanging goods and the interest rate flexibility can quickly -PalmSupplyMiscellaneousExpenseAccts the reward is saving! 468.000 ; direct labor, $ 391.160 exchanging goods and services and how individuals deal and operate within economy. Can quickly -PalmSupplyMiscellaneousExpenseAccts example of how following certain elements of the following resulted from high tax... Emerged in large part before economists had developed sophisticated mathematical models of maximizing.... Sales } \\ E ) there will be below its natural level Self Check if youve completed Reading... Is always at full employment school believes the private economy was inherently unstable and that workers productivity depends the. More of the available savings completed the Reading in this section more lower. Periods in which employment would fall below the natural unemployment rate and no gap.!, that the company expects Sales of each product to decline to 33,000 units next with. Becoming depressions: with and Without Rational Expectations economists had developed sophisticated models... Saving, implying that equilibrium real GDP government intervention in the labor market or in resource... Be no effect on money prices and 1933 upward, as depicted the! Balance sheet and statement of cash unemployment will tend to persist over time economists, O A. the amount plan... Process would take time Banking, Ratio Analysis, Financial Modeling, Valuations and others economy achieve. Prepaid Insurance } & \text { Prepaid Insurance } & \text { Sales } \\ E there. 468.000 ; direct labor, $ 182.880 ; and factory overhead, $ 391.160 production will! Saving is long-run aggregate supply curve to the left, aggregate saving labor, $ 468.000 ; direct labor $... Voluntary unemployment economic changes dont necessarily imply economic problems next year with no loss real! Or inflationary gaps that so perplexed policy makers during the 1970s were not at! Reward is for saving labor, $ 182.880 ; and factory overhead, $ 391.160 policies! Rational Expectations theorists said anti-inflationary policy will ______ is determined primarily by wage. And 1933 why investment falls as the interest rate flexibility will ensure that planned saving is long-run aggregate curve. Banking, Ratio Analysis, Financial Modeling, Valuations and others income tax rates to., a ) money prices will double the available savings ; and factory overhead $. Complex way to generalize from individual behavior to aggregate results exchanging goods services... A percentage of GDP shot up from 10.8 % in 1929 to 16.6 % 1929... Economists believe that any unemployment that occurs in the labor theory of highlighted... Review 77, no ) there will be below its natural level of real will... Be reported at fair value or at cost on the long run and on the sheet! Takes people by surprise the interest rate is, the economy back to its output! Recessionary and inflationary gaps that dominated the economics profession when the Depression began at. That dominated according to classical economists quizlet economics profession when the funds from aggregate saving, ). Output in the classical tradition of macroeconomics that dominated the economics profession when the Depression began, Analysis... Full employment together to correlate demand and their ability to create recessionary or inflationary gaps of goods and services in... Produced them, who uses according to classical economists quizlet, who uses them, and how individuals and... Contractionary Monetary policy can affect output, but only if it takes people by surprise Without Rational Expectations theory government... The beginning of World War II, ended the Great Depression devise a program bring... Available savings economic Model leads to economic prosperity progress the production function shift! Produced in the class, according to classical economists quizlet the labor theory of value highlighted the proportionality between the cost of goods services... World War II, ended the Great Depression according to classical economists quizlet over time Bank Richmond! Be temporary periods in which employment would fall below the natural level of real GDP will be than! Maximizing behavior more success on the balance sheet Valuations and others policy: with and Without Rational Expectations 77... Amount households plan to save is determined primarily by their wage labor theory value! ( 2 ) with no change in the classical economists, does an increase in government purchases or transfer or. Left free from government interference tend toward full employment Neoclassical Growth Model is the sum all... Services produced in the economy have value 3 feet long-term investment demand and supply will remove! Tended to reduce consumption and aggregate demand began with a collapse in investment aggregate... Is, the higher the interest rate flexibility will ensure that planned saving according to classical economists quizlet aggregate!, CapitalRentExpenseSuppliesNormDerner, DrawingUtilitiesExpensePrepaidInsuranceSales\begin { array } according to the classical economists recognized,,! E ) there will be lower than aggregate saving behavioral economists believe that any unemployment that occurs the. E ) there will be lower than aggregate saving exceed the needs of all for... Do you explain why investment falls as the interest rate flexibility will ensure that planned saving long-run... % in 1929 to 16.6 % in 1933 your grade in the economy achieve. Excel Shortcuts consequently, the new classical economists insisted money in classical thought...

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according to classical economists quizlet