Question

1. classical economists believe that the economy is stable and tends toward full employment because

o a. the government plays an active role in managing the economy.
o c. the short run is more important than the long run, and economic policy only works in the short run. c. the short run is more
important than the long run, and economic policy only works in the short run.
o e. prices are sticky and will not prevent the economy from adjusting to full employment.
o d. prices are flexible and allow the economy to return to full employment.
o b. savings is a drain on demand and must be limited.

Explanation:

Classical economists believe in the flexibility of prices and wages. They think that in the long - run, if there is a deviation from full - employment (for example, a recessionary gap where aggregate demand is low), flexible prices (including wages) will adjust. If there is excess supply in the labor market (unemployment), wages will fall, making it cheaper for firms to hire workers. This will increase production and bring the economy back to full - employment. Similarly, in goods markets, if there is excess supply, prices will fall, increasing quantity demanded until equilibrium (full - employment level of output) is restored.

• Option a is incorrect because classical economists advocate for a laissez - faire approach, where the government has a minimal role in the economy.
• Option b is incorrect. Classical economists believe that savings (a leakage) is matched by investment (an injection) through the interest - rate mechanism. Savings are not seen as a drain on demand that must be limited.
• Option c is incorrect. Classical economists focus on the long - run. They believe that in the long - run, the economy will self - adjust, and economic policies (especially government - led ones) are not necessary as the short - run deviations will correct themselves.
• Option e is incorrect. The idea of sticky prices is more associated with Keynesian economics. Classical economists assume price flexibility.

Answer:

d. prices are flexible and allow the economy to return to full employment.