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This is a purely classical (pre-keynesian) story - demand goes down in many individual markets, and the market adjusts by reducing prices and quantity supplied. It has no output gap, no involuntary unemployment (read: wages at a price $P, but people willing to work at $P and unable to find a job), etc.

You've just shown that classical economics explains the Greek situation perfectly, contradicting Varoufakis.



No, neoclassical economics would have us believe that wages would go down until a clearing price was hit and everybody was employed.

This is, indeed, exactly the type of mind numbing idiocy that Varoufakis was talking about.


That's exactly what happens in your story. Wages go down from $P to $P2. Fewer people are willing to work at $P2 than at $P, so employment goes down. That's a standard market clearing story.

The classical claim is that don't have involuntary unemployment - prevailing wage levels equal to $P (in some segment) and simultaneously people unable to find work at $P.

Your story agrees with this.




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