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Chapter 13: Q.6 (page 332)

Do neoclassical economics view prices and wages as sticky or flexible? Why?

Short Answer

Expert verified

Neoclassical economists believe that prices and wages are flexible in the long run.

Step by step solution

01

Introduction of neoclassical economics.

Say's the law has a long-run outlook for neoclassical economists. Prices and earnings, they believe, are long-term variables.

02

Explanation of solution.

Without government involvement, the economy self-corrects and adjusts. When the economy's aggregate demand falls short of its potential output, the AD curve shifts to the left, signaling a recession. There is a surplus of goods and services as a result of the recession. Prices will reduce in the long run as a result of surplus supply, resulting in an increase in demand for commodities. It will cause the AD curve to shift to the right, bringing the economy back to the full employment level of GDP.

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