howdy folks its mr. Ryan and we're about to talk about an important theory in the history of economics but before we talk about that theory I want to review a couple things with you that you have learned so far and these couple things that I want to review with you are important for understanding this theory so what I want to review with you first is the idea of market equilibrium market equilibrium the idea that in a market that all market and product markets or factor markets or whatever that there's a supply for whatever is being produced and sold and there is a demand for whatever is being produced and sold and we know that the horizontal axis is the quantity and that the vertical axis is the price and we know that the market forces of supply and demand tend to move the price toward what is called equilibrium price and the quantity toward what is called equilibrium quantity okay now remember equilibrium quantity is the quantity of product or whatever is being sold where the quantity demanded is equal to the quantity supplied meaning that the the sellers and the buyers agree on how much will be bought and sold neither one of them at that price wants to sell more or sell less and neither one of them wants to buy more or buy less okay but what we did not discuss in great detail in class is the idea of what happens when the price is higher than the equilibrium price or when the price is lower than equilibrium price let's say that we were in a situation where in a market the price was too high okay the price for this product is really high okay at this really high price we have this situation where the quantity supplied is a lot higher than the quantity demanded okay so we have a situation where quantity demanded or quantity supplied is greater than quantity demanded so the buyers don't want to buy as much as the sellers want to sell so the sellers are willing to produce a lot but the buyers are only willing to buy a little and so if the suppliers are selling or are making more and the buyers are buying less what happens is there's too much stuff left over there's too much available to buy and we have what is called a surplus a surplus because there's more produced to sell than how much the buyers want to buy and here's what's happening the buyers will say hey if you lower the price we will buy more and the suppliers are saying hey we really want to sell this stuff will you buy it if we lower the price and the buyers say yes so both the buyers and the sellers agree that the price of this product should be lower and what happens is they do lower the price through the equilibrium price the price will naturally the forces of supply and demand will force the price down quantity demanded will increase quantity supplied will decrease and we will result in equilibrium quantity and then we will clear out there won't be a surplus anymore and this will happen naturally between the buyers and the sellers okay now let's talk about the opposite situation all right now let's see what happens in a market when the when the price is too low so here we are we got a supply curve we got a demand curve doesn't matter what the product is it could be a factor it could be a factor of production could be lumber it could be workers it could be the labor market it could be a product it could be a service but let's say that the price is too low the price is too low in a situation where the price in the market is too low quantity demanded is going to be significantly higher than quantity supplied so in this case quantity supplied is less than quantity demanded and what's going to happen in this case where this is a price and it's too low where we have a price that's too low is that demanders are going to want they want as much as they can get at this lower price but suppliers are apprehensive they say well we can't make as much as you want at this low price and so what the amount that people want is so much higher than this is quantity demanded this is quantity supplied that we have what's called a shortage in the market a shortage there is not enough of this product to satisfy demand and so what usually winds up happening is is that the suppliers say to the demanders hey if you'll pay us more money we will make more and the demanders here's what happens off the more oftentimes is that the demanders will bid up the price they will say look we know the price is you know 17 dollars but we'll give you $20 per unit if you if you'll sell it to us instead and so ultimately the suppliers and the demanders the buyers and the sellers they bid up the price the price goes up to equilibrium price when that happens quantity demanded decreases quantity supplied increases and they meet at equilibrium price and equilibrium quantity okay and so it's important for you to understand what happens in a market when the price is too high or the price is too low all right so in the labor market the price in the labor market is called wages okay so the price is called wages that's how much we get paid right and what can happen sometimes is in the labor market the the wait wages could be too low okay so this is price that's too low that means that the quantity supplied of labor and the quantity demanded of labor are not equal quantity demanded is higher than quantity supplied now what is the supply of labor well that's workers right and the demand for labor well that's businesses that pay workers businesses are the demanders of Labor workers are the supply of labor and when they're when the price is too low there is a shortage a shortage of labor and what happens is the demanders the businesses offer more money to the workers they say hey I'll pay you more money if you'll come work for me and they bid up the price to equilibrium price and when that means wages equilibrium wages I guess you could say wages go up and when wages go up people are willing to work more and businesses are willing to buy a little bit less and that results in an equilibrium quantity of labor hours or labor days or or whatever the quantity is the number of people working on the other hand we could have a situation where the price of labor is too high I know you might be thinking that's a that doesn't sound like a problem to me if I'm a worker I want the price of labor to be really high actually you don't want the price of labor to be high see what happens in a situation where the price of labor is hot is higher than equilibrium price that means price high that means wages are too high more people more workers are willing to work they're willing to work more and more people are willing to work so the supply of labor is really high but businesses don't want as much labor and what that means is that there is a surplus there's a surplus of Labor and what's going to happen when there's a surplus of labor is that businesses actually really though the workers themselves are gonna bid down the price of labour to equilibrium to equilibrium price workers are gonna say hey pay me less so that I can work for you right now I don't have a job I'll do anything for a job I know everyone else is getting paid $12 an hour but if you pay me $9 an hour I'll come work for you and the employer says 9 bucks an hour absolutely I'll hire you and so the price of wages goes down and when that happens businesses are willing to buy more but workers are willing to work less because the wages are lower and therefore we come down to equilibrium quantity okay and so this idea of supply and demand of Labor and the idea of equilibrium quantity an equilibrium price is relevant to the labor market I want you to remember that in the lesson that's coming up on classical economic theory okay the second thing that I want to review with you is the aggregate market and I want to review what happens in the aggregate market what happens to aggregate supply when production costs increase or decrease so remember when production costs decrease that means production costs that means it costs less money for businesses to make stuff so when production costs go down businesses can make more stuff and short-run aggregate supply goes up and when short-run aggregate supply goes up that is a rightward shift of the short-run aggregate supply curve and that means that there will be an increase in real GDP real GDP goes from here to here so whenever production costs go down in an economy that results in an increase in short or an aggregate supply and also an increase in real GDP alternatively what happens in an economy when production costs go up what happens when it's more expensive to make stuff well when production costs go up short or an aggregate supply goes down just reviewing here we're reviewing the shifts in short run aggregate supply when it costs more money for businesses to make stuff businesses cannot make as much because it costs more to make it therefore aggregate supply will decrease so that's a leftward shift of the short-run aggregate supply curve and real GDP was here now real GDP is here and so we have a decrease in real GDP and here's the last thing that I want to tell you is wages in the economy will affect production costs when wages go down that's a decrease in production costs and that means when wages go down aggregate supply will go up however when wages go up in an economy that's an increase in production costs and that leads to a decrease in short run aggregate supply so the basic idea here that you need to understand is that when wages go down real GDP goes up but when wages go up real GDP goes down and I want you to remember that and now we're gonna move on to the lesson for today how do you folks this is mr. Ryan and what we're gonna do talk about in this video is we're going to talk about what's called classical economic theory so what we're gonna do is we're going to talk about the assumptions of classical economic theory or some of the assumptions of classical economic theory we're gonna talk about how classical economic theory is proposed to close recessionary gaps and then we're going to talk about how classical economic theory is proposed to close an inflationary gap these are the three main things I expect you to understand about classical economic theory so let's talk about the three main assumptions of classical economic theory the first assumption of classical economic theory goes like this so assumption number one is that the economy is self-correcting or self-regulating let's say self-regulating okay what this means is this is that the when we're in an inflationary gap or a recessionary gap when things aren't going the way we want them to go or we think that they should go in the economy that we don't really have to do anything we don't really have to change our behavior that if we just keep doing what we're motivated to do that eventually the economy will self-correct kind of like waves in the ocean you know when if we think the waves are out of control we don't run out to the water and try to push down the waves as they go up and we don't try to pull up the the troughs of the wave as they go down we just let the waves do what they're doing and we assume that eventually after the wind isn't so strong or when other natural things that are happening in the environment settle down that eventually the waves will just settle down and they do now the question is whether we can assume that about the economy so the economy is very different than the ocean so we can't just assume just because the ocean waves settle down that the economy will settle down but we but in classical economic theory we do believe that we're session airy gaps or let's just say gaps in general gaps are temporary so inflationary gaps and recessionary gaps are temporary they're self-correcting they don't need temporary and self-correcting and the assumption here is a part of this assumption is that short-run equilibrium will always move back to long-run equilibrium okay so what you know in the business cycle you know when we have the here's the the natural real GDP and you know we have our fluctuations in the business cycle right we have our inflationary gaps in our recessionary gaps and according to classical economic theory these gaps will always close by themselves that when we get into an inflationary gap that there will be natural economic forces that pull it back to the long-run curve and this short-run curve when it's in a recessionary gap there are natural for natural economic forces that will always pull it back to the long-run curve that's what classical economic theory is assuming and so then this has come this has resulted in a popular economic freeze called laissez faire la is a French phrase laissez faire so when you hear somebody say laissez faire what they mean is hands-off this basically means hands-off or let it be let it be let it be let it be let it be he let it be the economy is self-correcting let it be or leave it alone leave it alone and so what a lot of classical economists say is don't do anything just keep just keep going out there doing what you're doing if you're business persons go do business if you're a consumer go buy stuff if you're a worker go to work don't there's nothing special that you have to do to fix the economy the economy will fix itself as all the people do what is best for them okay so that's the first assumption of classical economic theory is that the economy is self-correcting okay so laissez faire don't do anything so when when everybody starts freaking out and the government says well what are we gonna do you know people unemployment is high and and you know real GDP is down what are we gonna do the classical economists they're gonna come forward they're gonna say don't do anything government just let everybody keep doing what they're doing and eventually this stuff will will work itself out the second assumption of classical economic theory now understand all these assumptions are questionable whether they are whether they are true or not and here's what it says is that inadequate demand in adequate demand meaning demand that is lower than supply okay so if we have all kinds of stuff if we have the supply and people aren't buying that's inadequate demand will not cause will not cause the economy to crumble meaning everything's not going to fall apart just because there's not enough demand in fact what sees law says now say these laws not really a lot they call it say's law is that supply creates its own demand supply creates its own demand the idea here is this is if if you make it they will buy it eventually they will buy it people want stuff and so if somebody makes something somebody will eventually buy that thing and so and when your when when suppliers are making stuff as they're selling things they earn income and that income goes to the employees and goes to the owners of the business and those people will eventually go out there and buy stuff so this is kind of a shaky you know this is sort of a shaky assumption here you have to have a lot of faith to really believe that this is absolutely true but there is truth to the idea that when people make something someone will eventually want it now whether they will pay what they should pay for it or whether they will pay enough to cover the costs of the thing that was made that's that that remains to be seen but if somebody makes something if it is something that people value then people will want to buy it eventually okay and so the idea here is that things will never get bad enough the assumption is things will never get bad enough to where there's not enough demand such that the the entire economy will crumble so this assumption here the way I see it is that you have to be patient you know you can't think that the entire economy is just gonna fall apart and that's exactly what people thought was gonna happen during the Great Depression and that's kind of the Great Depression is kind of when classical economic theory was really challenged and people really gave up on a lot of these assumptions because it just kept persisting the third assumption of classical economic theory assumption number three you should be writing these down I hope you're writing them down assumption number three is that this is this is a huge one and here's one of the problems it's not a problem with economic theory it's just that when if this assumption assumption number three fails if it is false then all of economic theory or classical economic theory becomes problematic and here's the third assumption is that wage rates are flexible meaning the money we pay workers wage rates are flexible up and down and I'm we got to talk about the labor market what this what this means is this is workers are okay with getting a raise and workers are okay when they're when their income goes down so workers are okay if you raise their income or lower their income now we know that that is not true we know that people get bent out of shape when you lower their income you know if somebody makes $15 an hour and then they come in one day and everybody and the boss says look we just you know where things are hard right now so we can only pay you $13 an hour that person is likely to walk out the door now that's not to say that this assumption is false entirely because here's what could happen is if that person making $15 an hour does walk out the door that boss can now hire somebody making $13 an hour and so wage rates really are flexible downward okay so this is a this is a tough assumption but in order to understand this third assumption here about wage rates being flexible up and down we need to look at the labor market we need to look at the supply of the labor market well what is the supply of the labor market you are your if you're an employee if you have a job or if you're gonna have a job someday you are the supply of the labor market I am the supply of the labor market I am an employee of Rockdale County Public Schools I work for the county and so I supply labor to the county then there's demand for labor well who are the demanders well those are all the employers like Rockdale County Public Schools is a demand er of Labor they demand well then they they are willing and able to buy my time and effort to do to teach students they also are willing and able to buy other kinds of people who aren't teachers administrators or cafeteria workers or people who work in the front office that sort of thing okay so we have suppliers which are the workers and then we have the demanders which are basically the businesses so businesses are demanding labor from workers who are supplying labour now the price the price and the quantity quantity is hours worked let's just call it hours worked and the price is the wages so the the amount of money that is paid to worker that's the price in the labor market so we have equilibrium price or equilibrium wage and we have equilibrium quantity in the labor market so here's the deal is if supply of workers increases so if we if the supply curve is there now more workers in the in the labor market watch what's gonna happen to wages wages are gonna go down and nobody likes that nobody likes for wages to go down but that's exactly what's gonna happen if there's an increase in supply in the labor market on the other hand there's another thing that can lead to a decrease in wages and that is a decrease in demand if workers are not needed as much and there's a lot of reasons why workers might not be needed as much for example if these economy is in a recession and businesses are going out of business or they don't have as much demand for the stuff that they make well they don't need as many workers and so that the demand for products goes down well then that means the wage rate is gonna go down and people are going to get paid less now one way that wage rates can go down let's say that somebody says no I make $15 an hour you can't cut my pay well then oftentimes what they'll do is they'll cut your hours and your pay will go down because they're cutting your hours or like I said they will you know maybe they won't schedule the $15 an hour guy as much they'll schedule the $12 an hour guy more they'll give him more hours because because he gets paid less and if you read the section on price ceilings and price floors basically when workers say we're not going to work for less what they're effectively doing is they are setting a price floor on wages and when demand goes down and we now have this this is what the wages need to be what we'll have here is we will have a surplus we will have a surplus of Labor and that surplus of Labor basically is going to be unemployment okay anytime you'll have more workers than you have jobs available and that leads to unemployment okay so this is I just needed to show you how the labor market works just like a product market that the supply curve and the demand curve can shift to the left and the right that the price can go up and down and that the quantity can go up and down just like in a product market okay but when the price goes up or down that's a change in the wages and the Assumption here in classical economic theory is that wage rates are flexible just like in any market that the price is flexible up and down that that whatever the wages are in a particular economy for workers is going to be based on the demand for those workers and based on the supply of those workers just like any other product what we're gonna see in a little bit though is that that failed this idea of wage rates being flexible up fine you can raise my weight raise my pay all you want but don't you dare lower my pay and because of that psychological idea that that people have decided that you can't cut my pay that caused a problem for classical economic theory okay so what we're gonna do now is we're going to move on to explaining how classical economic theory explains the closing of a recessionary gap alright folks let's move on to item two here we're going to talk about how classical economic theory suggests that a recessionary gap is closed when I draw your attention to this aggregate market graph over here as you can see we have a short-run aggregate supply curve we've got an aggregate demand curve here's our long-run aggregate supply curve but you'll notice that aggregate demand intersects short-run aggregate supply right here and therefore the real GDP equilibrium real GDP is lower than the long-run aggregate supply or the natural real GDP right so real GDP is lower than the long-run equilibrium and what in this space right here the fact that real GDP is lower than natural real GDP indicates that we are in a recessionary gap and we want we would like for this recessionary gap to close because our the output in our economy is lower than what the output could be now I want to remind you something I want to remind you what oaken's law says oaken's law basically says that when real GDP is low that means that unemployment is high unemployment is high that there's a negative relationship between national output or domestic output and unemployment so when we're producing less in an economy that means that more people are unemployed and that makes sense because if all those people were employed then that would mean that we would be producing more and output would not be low it would be higher so when output is low that's because there's a lot of people who are not being used by the way it's not only people that aren't being used it's also natural resources not being used it's so capital not being used it's also infrastructure that's being under utilized okay so when we do when we under utilize our factors of production we result in lower output and so lower output means that we have high unemployment well what is high unemployment high unemployment means that the number of workers is less than the number of jobs available okay so there are fewer excuse me another way around sorry the number of workers is greater than the number of jobs available okay so there's people standing around not working because there aren't jobs available for them to go work we call that unemployment what that means is that there is a surplus of workers the supply of workers the supply of Labor is greater than the demand for labor jobs available that's demand for labor number of workers that supply of Labor and what that means is that over in the over in the labor market the supply of Labor and the demand for labor we have a situation where the quantity supplied is higher than the quantity demanded now the only way that that can happen the only way that quantity supplied can be higher than quantity demanded is if the is if the wage rate is too high we have this situation here we go where quantity supplied of Labor is here and quantity demanded of Labor is here quantity demanded so the gap here the difference here between quantity supplied and quantity demanded that's that's unemployment that's the number of workers that aren't working that want to be working well there's a problem here there's a reason why this is happening look this is what classical economic theory says when this happens that must mean that wages are too high wages are above the equal Braham rate the equilibrium wage rate is lower because if the equal if if wages were lower quantity supplied would be lower quantity demanded would be greater and we would reduce this gap and so what we have here the unemployment is a surplus a surplus of Labor there are too many people that want to work that are not working so what classical economic theory here is saying is that when there's this surplus of Labor in the market if wage rates would just go down and they will on their own it's a market the forces of supply and demand will force wages down how does that happen because there's so many workers available to work the workers bid down the price they say hey look I know that you're paying everybody $10 an hour but I will come work for you for $8 an hour if you'll pay me $8 an hour I just need work so please pay me $8 an hour and when those employers start listening to those workers that want to work what will eventually happen is the price of labor will get will get bid down by the suppliers by offering to sell for a lower price and when that price comes down the businesses the demanders will say well at that price at a lower price I can afford to pay more people for example you know if they were paying $10 an hour times for employees they were paying $40 an hour for the four employees but at $8 an hour they can pay five employees and pay the same amount of money and so now at a lower wage they can pay more employees and because of the law of demand a lower price means higher demand so what will happen is quantity demanded will increase but at a lower price at $8 an hour some of the workers some of these workers in the supply will say well I don't want to work for $8 an hour when wages were $10 an hour that was okay I wanted a job when it was $10 an hour but now that it's $8 an hour I don't want a job anymore so they're gonna leave the labor market that's gonna decrease supply demand well let's not let's stick with ceteris paribus but basically what's happening here is quantity supplied is going to decrease and we are going to have an equilibrium quantity and an equilibrium price in the labor market so now that equilibrium price has gone down I want to remind you of something a decrease in wages is going to lead to a decrease in production costs now it costs less money for producers to produce and what happens in the aggregate market when production costs go down doesn't that lead to an increase in short-run aggregate supply that leads to an increase in supply when it costs less to produce supply goes up because now they can produce more and so this short-run aggregate supply curve is going to shift to the right reflecting an increase short-run aggregate supply prime it's going to shift the short-run aggregate supply curve is going to shift to the right and watch what that's going to do is that is going to close the recessionary gap and now real GDP equilibrium real GDP is going to be equal to natural real GDP and so let me review this with you one more time how does how does classical economic theory explain the closing of a recessionary gap alright first real GDP is less than natural real GDP that's the definition of a recessionary gap unemployment is higher than the natural rate of unemployment okay and then wage rates fall in the labor market due to a surplus of labor there's more job seekers than there are jobs available when wages fall a decrease in wages lowers production costs causing an increase in the short-run aggregate supply curve and a rightward shift here real GDP then increases toward natural real GDP as short-run equilibrium moves toward long-run equilibrium this closes the recessionary gap and this whole process according to classical economic theory is automatic the government does not have to step in and do anything all that has to happen is that businesses and workers just need to behave in in to their own benefit to what's good for them and so that is how classical economic theory explains the closing of a recessionary gap and what we're gonna do now is we're gonna now look at all this whole process in Reverse and we're gonna see how classical economic theory explains the closing of an inflationary gap all right folks now let's look at how classical economic theory explains the closing of an inflationary gap so here's our situation here's the aggregate market right here we've got our aggregate demand we've got our short-run aggregate supply let's say that long-run aggregate supply is right about here so the long-run equilibrium or natural real GDP is at this level of output real GDP price level okay so the level of output the the natural level of output is down here but look we're short-run aggregate supply and aggregate demand are intersecting they're intersecting at an output level that is above the long-run curve so short-run equilibrium or actual real GDP actual output in the economy is higher than the natural rate of gross domestic product the natural real GDP sorry the natural real GDP and so because actual output is higher than the long-run curve we are in an inflationary gap we're in an inflationary gap what that basically means is we are overproducing we are using all of our resources or most of our resources and we're using them too much we're overusing them eventually those resources are going to get burned out and bad things could potentially happen or we could just have company have economic consequences of burning out now what classical economic theory is gonna say is don't worry about the burning out all that is going to take care of itself all the people involved in this overusing resources eventually they're going to realize this is bad and it's going to result in real GDP decreasing to the natural level of out okay so so so the first understanding is I got a list here real GDP is greater than natural real GDP we're in an inflationary gap now because of that unemployment is low because real GDP is high that actually leads to a decrease in unemployment and you may think that that's good but it's actually not it's not good in a certain way if the natural rate of unemployment is let's say 4% what's likely happening here is we are overusing our labor resources that 4% that natural 4% rate of unemployment right now we're probably in this situation or probably at like 3 percent or 2 percent unemployment we're actually overusing the people that should be unemployed temporarily but instead of letting them be unemployed temporarily to either move to a better job or to get the skills they need for jobs available we coax them back into other jobs that aren't right for them and because we need people there's a shortage basically what's happening here is there's a shortage of Labor ok so the number of workers in this case is less than the number of jobs available ok so the demand the demand for jobs is greater than the supply or the demand for workers is greater than the supply of workers so the quantity demanded is higher than the quantity supplied of workers and what that indicates the only way that that can happen in the labor market is if the wage rate is if the wage rate sorry that's a wait that's a G if the wage rate is lower than the equilibrium rate and what that indicates here is that we have a shortage we have a shortage of labor there aren't enough workers for all the jobs that need to be done and so what businesses are gonna do watch what's gonna happen over here what businesses are gonna do is they are going to offer more money for workers they're gonna say look we we need 10 more employees well that business over there has 10 employees that we need let's offer those employees at that business over there more money so that they'll quit that job and come over here and work for us and so they're gonna bid up or if somebody's gonna quit and say hey I'm leaving that company over there is offering me $12 an hour the business might say whoa whoa whoa I'll get will give you $14 an hour if you just stay with us because we need you and so businesses are going to bid up the wages and so wages will increase wages will increase now when wages increase that's gonna lead to an increase in production costs so now businesses are going to have to pay out more money to keep producing what they're producing and when production costs go up that's going to lead to a decrease in short-run aggregate supply because now it's more expensive to produce so supply is gonna go down and so this short-run aggregate supply curve is going to shift to the left give me a decrease in the short-run aggregate supply curve a leftward shift in the short-run aggregate supply curve and when that happens look what's going to happen look what's going to happen to real GDP the equilibrium is now going to be here real GDP is going to decrease and to where real GDP is now equal to the long-run curve short-run equilibrium will be equal to long-run equilibrium and real GDP will be equal to natural real GDP and the inflationary gap has now closed real GDP is greater than natural real GDP by definition that gives us an inflationary gap unemployment is lower than the natural rate of unemployment because the number of workers available is less than the number of jobs available according to oaken's law unemployment is down because real GDP is up but it's too low remember the natural rate of unemployment says that the number of workers is equal to the number of jobs available that's the natural rate of unemployment so when the number of workers is less than the number of jobs available that means that the unemployment rate is lower than it should be so what's going to happen in the labor market is this shortage of Labor because demand quantity demanded is higher than quantity supplied that indicates a shortage and the reason a shortage would occur is because the wage rate is too low and so businesses will bid up the wage rate they will offer workers more money to come work for them because they need workers when the wage rate goes up when wages increase that ultimately results in an increase in production costs in the economy and now that production costs have gone up that's an increase in how much it costs to make stuff so that means that businesses can't make as much stuff and short-run aggregate supply will decrease when short-run aggregate supply decreases our equilibrium real GDP goes back to long-run equilibrium or the natural real GDP and the inflationary gap has now closed and so that's classical economic theory so basically the idea here is according to classical economic theory is that the government does not have to get involved the government does not have to fix wages the government has doesn't have to come in and say let's force wages to go up to get this thing fixed faster just wait just wait for it to happen or in a recessionary gap wages are too high we need to lower wages the government does not have to get involved businesses and workers will agree together to lower wage rates and the recessionary gap will close because production will increase remember that this is just a theory we probably don't have enough evidence to convince everybody that it's a that it's an accurate theory there's probably a lot of evidence that does support it but there's there may be lots of evidence out there that offer also does not support it okay but I don't care whether you agree with classical economic theory or not what I do care is that you understand the assumptions of classical economic theory the basic procedure whereby a recessionary gap is closed according to a classical economic theory and the basic procedure by which an inflationary gap has closed based on classical economic theory and I will see you in the next class