Classical Tenents[]

  1. Classical Theory of Employment and Output Determination (real):
  2. Say's Law of Markets (real):
  3. Quantity Theory of Money (nominal): Regardless of the ammount of money that is in the economy there are real underlying factors which determine the real variables.

The Model[]

Output is a funtion of Capital and Labor modified by some exogenously determined variable "A" or "technology."


  1. “all economic agents (firms and households) are rational and aim to maximize their profits or utility; furthermore, they do not suffer from money illusion;
  2. all markets are perfectly competitive, so that agents decide how much to buy and sell on the basis of a given set of prices which are perfectly flexible;
  3. all agents have perfect knowledge of market conditions and prices before engaging in trade;
  4. trade only takes place when market-clearing prices have been established in all markets, this being ensured by a fictional Walrasian auctioneer whose presence prevents false trading;
  5. agents have stable expectations.” (Snowden 2005 p.38)


  1. Snowdon, Brian and Howard R. Vane. 2005: Modern Macroeconomics: Its Origins, Development And Current State. Edward Elgar Publishing

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