We will be analyzing Classical models for the first half of the course. Once we have set up the AD and AS curves, we can analyze the whole economy as we have previously analyzed individual unregulated markets. People adjust prices to eliminate excess demand and excess supply. Shortage of output, the price level must rise. Surplus of output, the price level must fall.
Price level rises, output stays the same.
Price level falls, output stays the same. Price level falls, output increases. Price level rises, output falls. Hume's thought experiment. Full employment is a conclusion that follows from the flexible price assumption.