Answer :
Final answer:
The Classical School of economics trusted in self-regulating markets, Say's Law and flexible prices. But the inability of the economy to self-correct during the Great Depression challenged these beliefs and caused a shift in economic thinking.
Explanation:
The Classical School of Thought in economics, which dominated macroeconomic perspectives prior to the Great Depression, rested on a few primary assumptions.
- Self-regulating markets: The Classical School strongly believed in the ability of markets to self-adjust and correct without the need for government interference.
- Say's Law: One of the other significant belief was Say's Law, which stated that supply creates its own demand.
- Flexible Prices: Another view was that prices adjust to maintain equilibrium, leading to full employment consequent to sufficient flexibility of wages and prices.
The severity of the Great Depression, however, provided a profound challenge to these assumptions. In this period, markets did not self-regulate effectively, leading to prolonged economic downturn, and widespread unemployment persisted, indicating that prices and wages were not adequately flexible. This failure of the economy to restore itself challenged the validity of the Classical School's vision and led to the development of new economic theories in the post-depression era.
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