Q.What are the main assumptions of the classical theory of employment?

The classical theory rests on a set of assumptions that together guarantee automatic full employment in a free market.

The classical theory of employment rests on the following main assumptions:

1. Say's Law holds — supply creates its own demand, so aggregate demand is always sufficient to buy aggregate supply.
2. Perfectly flexible wages — money and real wages adjust freely, clearing the labour market and removing any involuntary unemployment.
3. Flexible rate of interest — the interest rate adjusts to make planned saving equal to planned investment, so no saving 'leaks' out of the spending stream.
4. Flexible prices — product prices adjust to clear the goods market.
5. A free, competitive (laissez-faire) economy — no government interference; markets are left to correct themselves. …

Listing assumptions without linking them to the full-employment conclusion is a weak answer. Each flexible price (wage, interest, product price) plays a …