In the figure above, what do the classical/neoclassical economists suggest in terms of achieving full employment in the Long Run?

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Let’s examine what classical/neoclassical economists argue about the long-run adjustment to full employment.
Option 1: 'No action is needed, wages will go down and shift AS to the left.' The core classical idea is that in the long run, wages are flexible and will adjust downward when there is unemployment. This wage decline reduces production costs, encouraging more output, which in turn shifts the short-run aggregate supply (SRAS) or the economy moves toward potential output; the intended direction is a rightward adjustment toward full employment, not a leftward shift. The statement correctly says no action is needed, but the direction of shift is incorrect; the real mechanism is a reduction in wages leading to a rightward shift in supply, restoring full employment.
Option 2: 'Use monetary policy.' Classical theorists generally advocate against active demand-management policies in the long run, arguing that such policies misallocate resources and that the economy self-corrects via flexible wages and prices. Therefore, this option is inconsistent with the classical view that no policy action is required to achieve full employment in the long run.
Option 3: 'Use fiscal policy.' Similar to monetary policy, active fiscal stimulus or contration is not aligned with classical neutrality in the long run; the classical argument is that deficits/surpluses and demand-management interventions disturb the price-wage mechanism and are unnecessary for achieving full employment in the long run.
Option 4: 'No action is needed, wages will go up and shift AS to the left.' Here the wage adjustment is described as upward, which would increase costs and reduce output, pushing the economy away from full employment. This contradicts the classical mechanism, where wages fall (not rise) to restore full employment.
Overall, the central takeaway in classical/neoclassical thought is that the economy self-corrects to full employment in the long run without policy intervention, via flexible wages and prices. The primary misrepresentation among the options is the direction of the shift in aggregate supply accompanying wage changes; the classical mechanism would involve a rightward shift (not leftward) as wages fall, restoring output to potential. The option that aligns most closely with the classical stance is the one asserting no action is needed, while recognizing that the wage adjustment would promote a return to full employment through a rightward supply shift rather than a leftward one.

W25 ECON D001 52Z Prin Macroeconomics FinalExamECON1

In the figure above, what do the classical/neoclassical economists suggest in terms of achieving full employment in the Long Run?

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Similar Questions

Which of the following would cause the change shown in the diagram?

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Figure 33-5. Refer to Figure 33-5. The appearance of the long-run aggregate-supply (LRAS) curve

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W25 ECON D001 52Z Prin Macroeconomics FinalExamECON1

In the figure above, what do the classical/neoclassical economists suggest in terms of achieving full employment in the Long Run?

View Explanation

Log in for full answers

Similar Questions

Which of the following would cause the change shown in the diagram?

The long-run aggregate supply curve is vertical at the level of output:

In the long run, the output of the economy:

In countries that have high minimum wages and require a lengthy and costly process to get permission to open a business,

3. Which of the following describe a long-run aggregate supply curve. a. A vertical line. b. The price level is fixed. c. Output prices are flexible, but input prices are fixed. d. A horizontal line. e. An upsloping curve. f. Output is fixed.

Figure 33-5. ​ Refer to Figure 33-5. The appearance of the long-run aggregate-supply (LRAS) curve

The long-run aggregate supply curve is vertical because

The _____ curve is vertical at full employment.

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Making Your Study Simpler

Figure 33-5. Refer to Figure 33-5. The appearance of the long-run aggregate-supply (LRAS) curve