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IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features

In classical economics, Say's Law is most accurately summarised as which of the following?

Say's Law states that supply creates its own demand: the income earned in producing goods is enough to purchase them, so general overproduction cannot persist. The reverse claim, that demand determines output, is the Keynesian position, not the classical one.

  1. ASupply creates its own demand, so general gluts of unsold goods cannot persistCorrect
  2. BDemand creates its own supply, so output is determined by aggregate spending
  3. CPrices and wages are rigid downward, so unemployment can persist indefinitely
  4. DGovernment spending must fill any shortfall in private investment
  5. Money supply growth permanently raises real output

Explanation

Say's Law holds that production generates the income needed to buy the output produced, so a general glut cannot last. Option B reverses the direction and describes the Keynesian view, where aggregate demand determines output.

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