Final answer:
The neoclassical perspective holds that the economy will fluctuate around potential GDP, thanks to a self-adjusting mechanism based on flexible wages and prices. The conditions for the mechanism's operation are flexible wages and prices and absence of government intervention. The policy implications are that the government should focus on long-term growth and controlling inflation.
Step-by-step explanation:
The neoclassical perspective on macroeconomics holds that, in the long run, the economy will fluctuate around its potential GDP and its natural rate of unemployment. The self-adjusting mechanism that endows market systems with an automatic tendency to full employment is based on two building blocks. First, potential GDP determines the size of the economy, and second, wages and prices adjust flexibly over time to bring the economy back to its potential GDP level of output.
The conditions for the operation of the self-adjusting mechanism are that wages and prices are flexible, and there is no government intervention or regulation that hinders the market from functioning. In a neoclassical market, labor and product markets should be free from barriers and restrictions to allow adjustments to occur efficiently.
The policy implications of the neoclassical theory are that the government should focus more on long-term growth and controlling inflation rather than trying to manipulate short-run fluctuations in the business cycle. Neoclassical economics suggests that the market will naturally adjust itself to full employment and stable prices, and government intervention should be limited to creating a favorable environment for market forces to operate.