Question

question 4
2 pts

1. classical economists believe that government intervention in the economy is unnecessary because

b. savings is a drain on output and must be limited.
c. the short run is more important than the long run, and economic policy only works in the short run.
d. prices are flexible and, therefore, the economy will adjust back to full employment on its own.
e. supply is less important than demand in determining economic output.
a. prices are sticky and will not prevent the economy from adjusting to full employment.

Explanation:

Classical economists believe in the flexibility of prices. They think that in a free - market economy, if there are imbalances (such as unemployment), flexible prices (including wages, which are the price of labor) will adjust. For example, if there is unemployment, wages will fall, making it cheaper for firms to hire more workers. This will increase the quantity of labor demanded until the economy returns to full employment. They do not support government intervention as they trust the self - adjusting mechanism of the market based on price flexibility.

• Option b: Classical economists do not see savings as a “drain” on output. They believe in Say's Law (supply creates its own demand), and savings are channeled back into investment through the interest - rate mechanism.
• Option c: Classical economists focus on the long - run. They believe that in the long run, the economy will reach its full - employment level, and short - run fluctuations are temporary.
• Option e: Classical economists emphasize supply. Say's Law is a supply - side concept.
• Option a: “Prices are sticky” is a Keynesian concept. Keynesians believe that prices (especially wages) do not adjust quickly, so government intervention may be needed.

Answer:

d. prices are flexible and, therefore, the economy will adjust back to full employment on its own.