Description

Classical economists believe that any fall in Real GDP will be temporary and will end when labour markets adjust to the new price level. Classical economists argue that if there is a fall in AD then, in the short term, there will be a fall in real GDP However in the great depression of 1930s Keynes was very critical of this classical view he said that the long period of negative growth showed that markets do not automatically clear he argued that this was for various reasons.1.Wages are sticky downwards. Firms should cut wages to reflect lower prices but in reality, workers are very resistant to cuts in nominal wages.2.If wages were cut in response to unemployment, workers would have less spending power, therefore AD would continue to fall.