i. Classical economists believe in Neutrality of money, i.e, Money does not have any change in real factors but only changes in price. The basis of this is on the perfect price wage flexibility. Given these assumptions classical economist says that Aggregate demand does not have any change in output but only Supply factors have. This happends because suppose Aggregate demand falls because of fall in investment the product prices fall. The fall in prices of products makes the business entrepreneurs reduce wages so quickly that labour demand increases and as labour demand increases wages increases to restore full employment equilibrium. Real wages thus do not change and nor does employment,

ii. Mercantilits believed that the more the nation exports the more it earns in gold and the richer the economy is. For this system to continue, the government should put restrictions on imports.

Classical economists attacked as:

1. Government intervention should be minimal as classical economists favour free market mechanism.

2. Classical economists believed that trade benefits both countries importers and exporters or else there would not be any trade if the importers believed that they will be at loss.

3. Classical economists said that supply creates its own demand.